The following details are provided by a manufacturing company: $$\begin{array} { | l | r | }
\hline & \text { Product line } \
\hline \text { Investment } & \$ 1,190,000 \
\hline \text { Useful life } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 490,000 \
\hline \text { Residual value } & \$ 90,000 \
\hline \text { Depreciation method } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% \
\hline
\end{array}$$ Calculate the payback period for the investment.(Round your answer to two decimal places.)

Question

The following details are provided by a manufacturing company: $$\begin{array} { | l | r | } 
\hline & \text { Product line } \
\hline \text { Investment } & \$ 1,190,000 \
\hline \text { Useful life } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 490,000 \
\hline \text { Residual value } & \$ 90,000 \
\hline \text { Depreciation method } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% \
\hline
\end{array}$$ 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 total investment amount is recovered. For the first year, the inflow is $400,000, and for the second year, it's $390,000. The total for two years is $790,000. The remaining amount to recover the initial investment of $1,190,000 is $400,000. Since the inflows for the next ten years are $490,000 annually, the fraction of the year needed to recover the remaining $400,000 is $400,000 / $490,000 = 0.82 years. Therefore, the total payback period is 2 years + 0.82 years = 2.82 years.

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