Question

Payback Period

Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has:

1. Even cash flows of $400,000 per year or
2. The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000.

Required:

Calculate the payback period for each case. Round your answer to one decimal place.

a.	years
b.	years

Answer 1

a.	3.0 years
b.	5.0 years

Working

Payback Period
	Numerator	/	Denominator	=	Payback Period
	Initial Investment	/	Net cash inflow per year	=	Payback Period
Requirement a	$     12,00,000.00	/	$   4,00,000.00	=	3.00

Requirement b working

Year	Net Cash Flow	Cummulative Cash Flow
0	$(12,00,000.00)	$ (12,00,000.00)
1	$   1,50,000.00	$ (10,50,000.00)
2	$   1,50,000.00	$ (9,00,000.00)
3	$   4,00,000.00	$ (5,00,000.00)
4	$   4,00,000.00	$ (1,00,000.00)
5	$   1,00,000.00	$                 -

Payback period is period when all the investment is earned.