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: $\begin{array}{cr}
\text { Year } & \text { Cash Inflows } \
1 & £ 100,000 \
2 & 75,000 \
3 & 55,000 \
4 & 40,000 \
5 & 50,000 \
\text { Total } & £ 320,000
\end{array}$ Assume that the cash inflows occur evenly over the year. The payback period for this investment is

Question

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: $\begin{array}{cr}
\text { Year } & \text { Cash Inflows }  \
1 & £ 100,000 \
2 & 75,000 \
3 & 55,000 \
4 & 40,000 \
5 &  50,000 \
\text { Total } & £ 320,000 
\end{array}$ Assume that the cash inflows occur evenly over the year. The payback period for this investment is

Quizplus · Accepted Answer

To calculate the payback period, we need to determine the year in which the cumulative cash inflows equal the initial investment.

Year 1: £60,000
Cumulative cash flow at the end of year 1: £60,000
Still remaining: £240,000 - £60,000 = £180,000

Year 2: £80,000
Cumulative cash flow at the end of year 2: £60,000 + £80,000 = £140,000
Still remaining: £180,000 - £80,000 = £100,000

Year 3: £100,000
Cumulative cash flow at the end of year 3: £140,000 + £100,000 = £240,000

Therefore, the payback period is 3 years + (£100,000/£100,000) = 3.25 years.

The best choice is B.

Lewis Manufacturing Company Is Planning to Invest in Equipment Costing