In: Finance
An oil well will have a first cost of $470,000 and annual costs of $131,250. Income is expected to be $190,000 per year. What is the payback period at 6% per year interest?
a. Between 8&9 years
b. Between 9&10 years
c. Between 10&11 years
d. Between 11&12 years
Ans a. Between 8&9 years
Year | Annual Income (A) | Annual Cost (B) | Cash Flow/ Profit (A - B) | Cumulative Cash Flow |
0 | 0 | 470000 | -470000 | -470000 |
1 | 190000 | 131250 | 58750 | -411250 |
2 | 190000 | 131250 | 58750 | -352500 |
3 | 190000 | 131250 | 58750 | -293750 |
4 | 190000 | 131250 | 58750 | -235000 |
5 | 190000 | 131250 | 58750 | -176250 |
6 | 190000 | 131250 | 58750 | -117500 |
7 | 190000 | 131250 | 58750 | -58750 |
8 | 190000 | 131250 | 58750 | 0 |
9 | 190000 | 131250 | 58750 | 58750 |
10 | 190000 | 131250 | 58750 | 117500 |
TOTAL | 117500 | |||
Payback Period = | 8 years |