Question

Dave Hirsh publishes his own manuscripts and is unsure which of two new printers he should purchase. He is a novelist living in Parkman, Illinois. Having slept through most of his Finance 300 course in college, he is unfamiliar with cash flow analysis. He enlists the help of the finance professor at the local university, Dr. Gwen French, to assist him. Together they estimate the following expected initial investment (a negative cash flow) and net positive cash flows for years 1 through 3 for each machine. Dave only needs one printer and estimates it will be worthless after three years of heavy use. Dave’s required rate of return for this project is 8 percent.

Expected Net Cash Flow Year Printer 1 0 $(2,,000) 1 900 2 1,100 3 1,300 Calculate the payback period for Printer 1. year(s)

Answer 1

payback period = the period inn which initial investment is recovered.

amount to be recovered = $2000

year	cash flow	cumulative cash flow
1	900	900
2	1100	900+1100 =>2000

since initial investment is fully recovered at the end of year 2.

payback period = 2 years.