Question

Joe’s Hardware is adding a new product line that will require an investment of

$ 1,476,000. Managers estimate that this investment will have a​ 10-year life and generate net cash inflows of $ 310,000 the first​ year, $ 280,000 the second​ year, and $ 230,000

each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Answer 1

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 5 +( 196,000 / 230,000)

= 5.852173913 Years

Hence the correct answer is 5.9 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-14,76,000	-	-14,76,000	(Investment + Cash Inflow)
1	-	3,10,000	-11,66,000	(Net Cash Flow + Cash Inflow)
2	-	2,80,000	-8,86,000	(Net Cash Flow + Cash Inflow)
3	-	2,30,000	-6,56,000	(Net Cash Flow + Cash Inflow)
4	-	2,30,000	-4,26,000	(Net Cash Flow + Cash Inflow)
5	-	2,30,000	-1,96,000	(Net Cash Flow + Cash Inflow)
6	-	2,30,000	34,000	(Net Cash Flow + Cash Inflow)
7	-	2,30,000	2,64,000	(Net Cash Flow + Cash Inflow)
8	-	2,30,000	4,94,000	(Net Cash Flow + Cash Inflow)
9	-	2,30,000	7,24,000	(Net Cash Flow + Cash Inflow)
10	-	2,30,000	9,54,000	(Net Cash Flow + Cash Inflow)