Homework Answers
Payback period is the number of years it takes to re-earn the invested amount.
Amount of investment = $240,000
Year 1 Cash = $60,000
Year 2 Cash = $25,000. Cumulative cash amount = $60,000 + $25,000 = $85,000
Year 3 Cash = $30,000. Cumulative cash amount = $85,000 + $30,000 = $115,000
Year 4 Cash = $35,000. Cumulative cash amount = $35,000 + $115,000 = $150,000
Year 5 Cash = $35,000. Cumulative cash amount = $150,000 + $35,000 = $185,000
Year 6 Cash = $40,000. Cumulative cash amount = $185,000 + $40,000 = $225,000
Year 7 Cash = $60,000. Cumulative cash amount = $225,000 + $60,000 = $285,000. This exceeds the amount required to complete payback, and hence year 7 would only be fraction.
Fraction of Year 7 for Payback = ($240,000 - $225,000)/$60,000 = 0.25 year
Hence, payback = 6 + 0.25 years = 6.25 years
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