ABC Company is adding a new product line that will require an investment of $1 500 000. The product line is estimated to generate cash inflows of $300 000 the first year, $250 000 the second year, and $200 000 each year thereafter for ten more years. What is the payback period?

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash inflows until the initial investment is recovered. After 6 years, the cumulative cash inflow is $1,500,000 ($300,000 + $250,000 + $200,000*4 = $1,350,000). In the 7th year, $150,000 more is needed, which takes 0.75 of a year ($150,000/$200,000). Thus, the payback period is 6.75 years.

ABC Company Is Adding a New Product Line That Will