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In: Accounting

Beyer Company is considering the purchase of an asset for $270,000. It is expected to produce...

Beyer Company is considering the purchase of an asset for $270,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year.

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Net cash flows

$

66,000

$

39,000

$

67,000

$

200,000

$

22,000

$

394,000


Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

Year

Cash inflow (Outflow)

Cumulative Net Cash Inflow (Outflow)

0

1

2

3

4

5

Payback period =

years

Solutions

Expert Solution

answer
Payback period is 3.49 years (see solutions)
year cash inflow (outflow) cumulative net cash inflow (outflow)
0 -270000 -270000
1 66000 -204000
2 39000 -165000
3 67000 -98000
4 200000 102000
5 22000 124000
solution
year annual net cash flow cumulative net cash flow
1 66000 66000
2 39000 105000
3 67000 172000
4 200000 372000
5 22000 394000
cost of investment 270000 part of year = amount paid back in 4th year/net cash flow in 4th year
less: paid back in 1-3 year -172000                          = 98000 / 200000
partly in 4th year 98000                          = 0.49
pay back period = 3 + 0.49 = 3.49 years

ekkarill92 answered 1 year ago
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