Question

The Zingstad Corporation is considering an investment with the following data (Ignore income taxes.): Year 3 Year 4 Year 5 Investment Cash inflow Year 1 $ 32,000 $ 8,000 Year 2 $12,000 $ 8,000 $20,000 $16,000 $ 16,000 Cash inflows occur evenly throughout the year. The payback period for this investment is: Multiple Choice o 30 years 3.0 years • 3.5 years O 4.0 years o 4.5 years

Answer 1

Solution:

Payback period =last year with a negative cash flow +[(Absolute value of negative cash flow in that year)/(total cash flow in th following year)]

=3+(8,000/16,000)

=3.5 years

Hence, the correct answer is 3.5 years

Year	Investment	Cash inflow	net cash flow
1	-32,000	8,000	-24,000	(Investment - cash inflow)
2	-12,000	8,000	-28,000	(Net cash flow - investment + cash inflow)
3		20,000	-8,000	(Net cash flow + cash inflow)
4		16,000	8,000	(Net cash flow + cash inflow)
5		16,000	24,000	(Net cash flow + cash inflow)