Question

The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

Year	Investment	Cash Inflow
1	$73,000	$6,000
2	$ 6,000	$12,000
3		$20,000
4		$22,000
5		$25,000
6		$23,000
7		$21,000
8		$19,000
9		$18,000
10		$18,000

Required:

1. Determine the payback period of the investment. (Round your answer to 1 decimal place.)

2. Would the payback period be affected if the cash inflow in the last year were several times as large?

	Yes
	No

Answer 1

Answer:-1)-The payback period of the investment approximately is 5.8 years.

Explanation:-

Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

When cash inflows are uneven, then calculate cumulative net cash flow for each period and

Then use the following formula for payback period:

Payback period =A+B/C =5 years +($19000*$25000) =5.8 years Where:- A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A

2)- No, the payback period will be not affected if the cash inflow in the last year were several times as large, because the investment is recovered prior to the last year, the amount of the cash inflow in the last year has no effect on the payback period.

Unter Corporation
Calculation of pay back period
Year	Investment	Cash Inflows	Unrecovered Investment
	$	$	$
1	-73000	6000	67000
2	-6000	12000	61000
3		20000	41000
4		22000	19000
5		25000	0
6		23000	0
7		21000	0
8		19000	0
9		18000	0
10		18000	0