The directors of Bobcat and Blister Limited are currently appraising a proposed investment which will involve a cash outflow at time 0 of £97 200.The projected cash inflow arising from the project in year 1 is £28 000.The cash inflow is expected to rise by 9% in year 2, to remain at the same level as year 2 in year 3, and then to fall back to £25 200 in each of years 4 and 5. What is the payback period of the project to the nearest month?

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash inflows year by year until the initial investment is recovered. Year 1 inflow: £28,000. Year 2 inflow: £28,000 * 1.09 = £30,520. Year 3 inflow is the same as Year 2: £30,520. By the end of Year 3, the total inflow is £28,000 + £30,520 + £30,520 = £89,040, which is less than the initial investment of £97,200. In Year 4, the inflow drops to £25,200. To find out how many months into Year 4 it takes to recover the remaining £8,160 (£97,200 - £89,040), divide £8,160 by the annual inflow (£25,200) and then multiply by 12 months: (£8,160 / £25,200) * 12 ≈ 3.88 months. Therefore, the payback period is 3 years and 4 months.

The Directors of Bobcat and Blister Limited Are Currently Appraising