Lewis Manufacturing Company is planning to invest in equipment costing £240,000. The estimated cash flows from this equipment are expected to be as follows: Assume that the cash inflows occur evenly over the year. The payback period for this investment is

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to keep track of the cumulative cash flows.

Cumulative cash flow for Year 1 = -£240,000 + £80,000 = -£160,000
Cumulative cash flow for Year 2 = -£240,000 + £80,000 * 2 = -£80,000 
Cumulative cash flow for Year 3 = -£240,000 + £80,000 * 3 = £80,000

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. In this case, it takes 3 years and 3 months (or 3.25 years) for the cumulative cash flows to equal the initial investment of £240,000.

Therefore, the best choice is B.

Lewis Manufacturing Company Is Planning to Invest in Equipment Costing