The following details are provided by a manufacturing company: $$\begin{array} { | l | r | }
\hline & \text { Product line } \
\hline \text { Investment } & \$ 1,100,000 \
\hline \text { Useful life } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 380,000 \
\hline \text { Residual value } & \$ 70,000 \
\hline \text { Depreciation method } & \text { Straight-line } \
\hline \text { Required rate of return } & 14 \% \
\hline
\end{array}$$ Calculate the payback period for the investment. (Round your answer to two decimal places.)

Question

The following details are provided by a manufacturing company: $$\begin{array} { | l | r | } 
\hline & \text { Product line } \
\hline \text { Investment } & \$ 1,100,000 \
\hline \text { Useful life } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 380,000 \
\hline \text { Residual value } & \$ 70,000 \
\hline \text { Depreciation method } & \text { Straight-line } \
\hline \text { Required rate of return } & 14 \% \
\hline
\end{array}$$ Calculate the payback period for the investment. (Round your answer to two decimal places.)

Quizplus · Accepted Answer

The payback period is calculated by adding the annual net cash inflows until the initial investment is recovered. The first year inflow is $400,000, the second year is $390,000, and for the next ten years, it's $380,000 annually. The calculation is as follows: $1,100,000 investment is covered by $400,000 in the first year, $390,000 in the second year, and the remaining $310,000 is covered in part of the third year's inflow of $380,000. The exact time in the third year is $310,000 / $380,000 = 0.8158 years. Adding this to the first two years gives a payback period of 2 years + 0.8158 years = 2.8158 years, which rounds to 2.82 years.

The Following Details Are Provided by a Manufacturing Company Calculate the Payback Period for the Investment