Payback: Barcode Biz has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After 2 years, the cumulative cash flow is $1,355,250 ($640,000 + $715,250). In the third year, an additional $94,750 is needed to reach $1,450,000, which takes approximately 0.12 years ($94,750/$823,330). Thus, the payback period is 2.12 years.

Payback: Barcode Biz Has Invested in New Machinery at a Cost