Payback: Kryton Ltd has invested $2,165,800 on equipment. The company uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the company's payback criteria?

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash flows until the initial investment is recovered. The cumulative cash flows after each year are: Year 1: $424,386, Year 2: $936,564, Year 3: $1,498,319, Year 4: $2,263,316. By the end of Year 4, the investment is recovered, so the payback period is 3.87 years, which meets the company's criteria of less than four years.

Payback: Kryton Ltd Has Invested $2,165,800 on Equipment