Question

Birch manufacturing is considering the addition of another product line to its offerings. Equipment needed to produce the new line will cost $192,410. Birch estimates that the net cash inflows from the new product line will be as follows: Years 1-10 $17,750 (each year) Years 11-15 $4,970 (each year) Year 16-20 $2,070

If the company can establish a steady customer base before production starts and the cash inflows will be $14,400 per year for years 1 – 15, what will be the payback period? (Round answer to 2 decimal places, e.g. 1.64.)

The payback period years?

Answer 1

Pay back peroid
Year	Cash flow	Cumulative cash flow
0	($192,410)	($192,410)
1	$17,750	($174,660)
2	$17,750	($156,910)
3	$17,750	($139,160)
4	$17,750	($121,410)
5	$17,750	($103,660)
6	$17,750	($85,910)
7	$17,750	($68,160)
8	$17,750	($50,410)
9	$17,750	($32,660)
10	$17,750	($14,910)
11	$4,970	($9,940)
12	$4,970	($4,970)
13	$4,970	$0
14	$4,970	$4,970
15	$4,970	$9,940
16	$2,070	$12,010
17	$2,070	$14,080
18	$2,070	$16,150
19	$2,070	$18,220
20	$2,070	$20,290
Payback period = 12 years
Pay back peroid if company eastablish customer base
Year	Cash flow	Cumulative cash flow
0	($192,410)	($192,410)
1	$14,400	($178,010)
2	$14,400	($163,610)
3	$14,400	($149,210)
4	$14,400	($134,810)
5	$14,400	($120,410)
6	$14,400	($106,010)
7	$14,400	($91,610)
8	$14,400	($77,210)
9	$14,400	($62,810)
10	$14,400	($48,410)
11	$14,400	($34,010)
12	$14,400	($19,610)
13	$14,400	($5,210)
14	$14,400	$9,190
15	$14,400	$23,590
Pay back period = $192410/$14400
	13.36 years