Question

Raas Hardware is adding a new product line that will require an investment of $1,512,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $320,000 the first year, $280,000 the second year, and $240,000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Answer 1

	Year	Cash Flow	Cumulative Cash Flow
	0	(1,512,000)	(1,512,000)
	1	320,000	(1,192,000)
	2	280,000	(912,000)
	3	240,000	(672,000)
	4	240,000	(432,000)
	5	240,000	(192,000)
	6	240,000	48,000
	7	240,000	288,000
	8	240,000	528,000
	9	240,000	768,000
	10	240,000	1,008,000
	As per Above Table, Payback Period Lies Between Year 5 to 6
	Year 5 + (Cash Defict to be covered in Year 6)/Cash Flow in Year 6
	Year 5 + (192000)/240000)
	5.8 Years