Question

Exercise 11-1 Payback Method [LO11-1]

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

  

Year	Investment	Cash Inflow
1	$52,000	$4,000
2	$6,000	$8,000
3		$16,000
4		$17,000
5		$20,000
6		$18,000
7		$16,000
8		$14,000
9		$13,000
10		$13,000

  

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

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)]

= 4 + ( 13,000 / 20,000)

= 4.7 Years

Note :

Year	Investment	Cash Inflow	Net Cash Flow
1	-52,000	4,000	-48,000	(Investment + Cash Inflow)
2	-6,000	8,000	-46,000	(Net cash Flow +Investment + Cash Inflow)
3	-	16,000	-30,000	(Net Cash Flow + Cash Inflow)
4	-	17,000	-13,000	(Net Cash Flow + Cash Inflow)
5	-	20,000	7,000	(Net Cash Flow + Cash Inflow)
6	-	18,000	25,000	(Net Cash Flow + Cash Inflow)
7	-	16,000	41,000	(Net Cash Flow + Cash Inflow)
8	-	14,000	55,000	(Net Cash Flow + Cash Inflow)
9	-	13,000	68,000	(Net Cash Flow + Cash Inflow)
10	-	13,000	81,000	(Net Cash Flow + Cash Inflow)

2. The correct answer is No.

This is because the Payback period is 4. 7 Years and the cash inflow in the last year is in the 10th Year. Hence the cash flow in the last year would not effect the payback period.