Question

A dry-bean harvester requires an initial cash outlay of $350,000. The after-tax net cash flows from this harvester will be $80,000 during the first year: $50,000 for each of the second, third, and fourth years; and $45,000 for the fifth, sixth, seventh, and eight years. In year eight, the harvester can be sold for an after-tax salvage value of $150,000. What is payback period? 8 years 7 years 6 years 5 years 4 years 3 years 2 years 1 year

Answer 1

Payback period is calculated as follows:

Year	Opening Balance	CF	Closing Balance
0			$      3,50,000.00
1	$        3,50,000.00	$                   80,000.00	$      2,70,000.00
2	$        2,70,000.00	$                   50,000.00	$      2,20,000.00
3	$        2,20,000.00	$                   50,000.00	$      1,70,000.00
4	$        1,70,000.00	$                   50,000.00	$      1,20,000.00
5	$        1,20,000.00	$                   45,000.00	$         75,000.00
6	$            75,000.00	$                   45,000.00	$         30,000.00
7	$            30,000.00	$                   45,000.00	$        -15,000.00
8	$          -15,000.00	$                   45,000.00	$        -60,000.00

• Opening balance of year 1= Cost
• Opening balance = previous year's closing balance for all years after year 1
• Closing balance = Opening balance - CF
• We see that the closing balance for year 6 is 30000 and the CF for year 7 is 45000 so during year 7 the initial investment was recovered. The portion of year being 30000/45000 x 12= 8 months so the payback period is 6 years 8 months and if we have to report in whole years, it would be 7 years because till the end of year 6 the investment is not recovered and by the end of year 7 it is recovered.
• So the answer here is 7 years