Question

1. Investment Payback Period. Cynthia is 27 years old with a college degree and is interested in returning to school to earn a graduate degree in nursing which will take 4 years working part time while attending school in evenings. She currently earns $48,000 per year as a nursing administrator. If she cuts her job to part time as a nursing administrator, she will earn $20,000 per year. She will use student loans to fund the costs each year of tuition, books and fees, expected to be $11,000 per year for a part time student and will have an additional $2,000 per year in household expense loans on her credit card. Cynthia believes she can increase her income by $24,000 per year after graduation. Use an investment payback table to determine Cynthia’s Investment Payback Period.		15
Work: Investment Payback Period Expense Item Amount Lost-Income Household Expense Loans College Tuition, books and fees Total Costs Increase in Income Payback Period

Answer 1

Investment payback period

Lost Income{(48,000-20,000)*4} ( A)	112,000
Household Expense loans{2,000*4} (B)	8,000
College,Tution,books and fees{11,000*4} (C)	44,000
Total Costs (D=A+B+C)	164,000
Increase in Income (E)	24,000
Payback period (D/E)	6.83 years

Payback period, which is used most often in capital budgeting, is the period of time required to reach the break-even point (the point at which positive cash flows and negative cash flows equal each other, resulting in zero) of an investment based on cash flow.