Question

previous step and the initial outlay. t is easy to Veriy that you will get the same IRR as in your original calculation only if you use the IRR as the reinvestment rate in the previous step. QUESTIONS AND PROBLEMS Basic (Questions 1-18) 1. Calculating Payback (LO2) flows? What is the payback period for the following set of cash Year Cash Flow -$5,500 1,300 1,500 0 1 2 1,900 3 400 4 Click here for a description of Table: Questions and Problems 1. 2. Calculating Payback (LO2) An investment project provides cash inflows of $585 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3.300? What if it is $4,900? McKernan Inc. imposes a payback cutoff of three years for its 3. Calculating Payback (LO2)

Answer 1

Correct Answer:

Requirement 1:

Payback period: 3.57 Years

Working:

Year	Cash Inflows (outflows)	Cumulative Net Cash inflow (outflow)
0	$            (5,500)	$                 (5,500)
1	$              1,300	$                 (4,200)
2	$              1,500	$                 (2,700)
3	$              1,900	$                     (800)
4	$              1,400	$                       600
Payback period =	Year before full recovery +	unrecovered amount at the start of the next year / cash flow during the next year

Payback occurs between year 3 and 4
Year before full recovery		3
unrecovered amount at the start of the next year/	$            800.00	0.571428571	or 3.57 years
cash flow during the next year	$        1,400.00
Payback period =	3.57 years

Requirement 2:

A	initial investment	$ 1,700.00	$ 3,300.00	$ 4,900.00
B	cash inflow per year	$ 585.00	$ 585.00	$ 585.00
C =A/B	Payback period (Years)	2.91	5.64	8.38

Working:

When the cash inflows are constant, payback period can be calculating by dividing the initial investment by the yearly cash-inflow

End of answer.

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