The following details are provided by a manufacturing company. $$\begin{array} { | l | r | }
\hline \text { Investment } & \text { Product line } \
\hline \text { Useful life } & \$ 1,000,000 \
\hline \text { Estimated annual net cash inflows for first year } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for second year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 350,000 \
\hline \text { Residual value } & \$ 300,000 \
\hline \text { Depreciation method } & \$ 50,000 \
\hline \text { Required rate of return } & \text { Straight-line } \
\hline
\end{array}$$ Calculate the payback period for the investment.

Question

The following details are provided by a manufacturing company. $$\begin{array} { | l | r | } 
\hline \text { Investment } & \text { Product line } \
\hline \text { Useful life } & \$ 1,000,000 \
\hline \text { Estimated annual net cash inflows for first year } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for second year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 350,000 \
\hline \text { Residual value } & \$ 300,000 \
\hline \text { Depreciation method } & \$ 50,000 \
\hline \text { Required rate of return } & \text { Straight-line } \
\hline
\end{array}$$ Calculate the payback period for the investment.

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflows. For the first year, the inflow is $400,000, and for the second year, it is $350,000. The cumulative cash inflow after two years is $750,000. The remaining $250,000 needed to recover the initial $1,000,000 investment will take approximately 0.83 years at the rate of $350,000 per year. Thus, the payback period is 2 + 0.83 = 2.83 years.

The Following Details Are Provided by a Manufacturing Company Calculate the Payback Period for the Investment