Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 59,000 $ 5,000 2 $ 9,000 $ 10,000 3 $ 20,000 4 $ 21,000 5 $ 24,000 6 $ 22,000 7 $ 20,000 8 $ 18,000 9 $ 17,000 10 $ 17,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large

Answer 1

Answer:

Explanation:

Year        Investment               Cash Inflow         Accumulate Cash Inflow

1               $59,000                   $5,000       $5000

2              $9,000                     $10,000       $15000

3                                               $20,000       $35000

4                                                $21,000       $56000

5                                                $24,000       $12000

6                                               $22,000       $34000

7                                                $20,000       $54000

8                                               $18,000       $72000

9                                               $17,000       $89000

10                                              $17,000                        $106000

Pay back period ⇒ 4.5year ⇒ 68000/68000 + 12000/24000

⇒ 4.5years

2. Dexrease payback period

Answer 2

Answer:

4.5 years

No

Explanation:

The Payback period calculates the amount of time it takes to recover the amounts invested in a project from its cumulative cash flows.

Total investments = $-59,000 - $9,000 = $-68,000

In the first year: $-68,000 + $5,000 = $-63,000 is recovered

In the 2nd year: $-63,000 + $ 10,000 = $-53,000 is recovered

In the 3rd year: $-53,000 +  $ 20,000 = $-33,000 is recovered

In the 4th year $-33,000 + 21,000 = $-12,000

In the 5th year $-12000 + $24,000 = $12,000

The amount invested is recovered between the 4th and 5th year

4 years + $-12000 / $24,000 = 4.5years

The Payback period  would not be affected if the cash inflow in the last year were several times as large because the cash flow would have been recovered by the 5tj year.

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