RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: $$\begin{array} { c c }
\text { Year } & \text { Cash Flow } \
\hline 1 & \$ 20,000 \
2 & 24,000 \
3 & 30,000 \
4 & 40,000 \
5 & 20,000
\end{array}$$
Cost of capital is 18 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Question

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: $$\begin{array} { c c } 
\text { Year } & \text { Cash Flow } \
\hline 1 & \$ 20,000 \
2 & 24,000 \
3 & 30,000 \
4 & 40,000 \
5 & 20,000
\end{array}$$
Cost of capital is 18 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flow to equal the initial investment. Here, the cumulative cash flow at the end of each year is: Year 1: $20,000, Year 2: $44,000 ($20,000 + $24,000), Year 3: $74,000 ($44,000 + $30,000), and so on. The initial investment of $60,000 is recovered between Year 2 and Year 3. To find the exact payback period, calculate the fraction of the year needed to recover the remaining $16,000 ($60,000 - $44,000) in Year 3. Since Year 3's cash flow is $30,000, the fraction is $16,000 / $30,000 = 0.53. Therefore, the payback period is 2 years plus this fraction, or 2.53 years.

RentitAll Management Services Is Considering an Investment of $60,000 Cost of Capital Is 18 Percent