The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment.
Assuming that the cash inflows occur evenly over the year,what is the payback period for the investment? (Ignore income taxes in this problem. )

Question

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment. 
Assuming that the cash inflows occur evenly over the year,what is the payback period for the investment? (Ignore income taxes in this problem. )

Quizplus · Accepted Answer

To calculate the payback period, we need to determine the amount of time it takes for the initial investment to be recovered through the annual cash inflows. We can do this by dividing the initial investment by the annual cash inflows until the total sums up to $200,000.

Year 1: $30,000
Year 2: $50,000
Year 3: $65,000
Year 4: $50,000
Year 5: $35,000

Payback period = Year before full recovery + (Unrecovered investment at beginning of year / Cash inflow during year) 
Payback period = 3 + (($30,000 + $50,000) / $65,000) 
Payback period = 2.50 years

Therefore, the payback period for the investment is 2.50 years.

The Keego Company Is Planning a $200,000 Equipment Investment That