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Fill in the Blank QuestionFill in the blank question.A company is considering a capital investment of $16,000 in new equipment which will improve production and increase cash flows for the next five years at the following amounts: Year 1: $8,000; Year 2: $6,000; Year 3: $5,000; Year 4: $6,000; Year 5: $5,000. The payback period is years.

Question

Fill in the Blank QuestionFill in the blank question.A company is considering a capital investment of 16,000innewequipmentwhichwillimproveproductionandincreasecashflowsforthenextfiveyearsatthefollowingamounts:Year1:16,000 in new equipment which will improve production and increase cash flows for the next five years at the following amounts: Year 1: 8,000; Year 2: 6,000;Year3:6,000; Year 3: 5,000; Year 4: 6,000;Year5:6,000; Year 5: 5,000. The payback period is years.

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Solution

The payback period is calculated by adding up the cash flows from the investment until the initial investment is fully recovered.

Here's how to calculate it:

  1. Start with the initial investment of $16,000.

  2. In Year 1, the company receives 8,000.Subtractthisfromtheinitialinvestment:8,000. Subtract this from the initial investment: 16,000 - 8,000=8,000 = 8,000.

  3. In Year 2, the company receives another 6,000.Subtractthisfromtheremainingbalance:6,000. Subtract this from the remaining balance: 8,000 - 6,000=6,000 = 2,000.

  4. In Year 3, the company receives 5,000.However,theremainingbalancefromtheinitialinvestmentisonly5,000. However, the remaining balance from the initial investment is only 2,000. Therefore, the payback period is somewhere in Year 3.

To find the exact payback period, divide the remaining balance by the cash flow of Year 3: 2,000/2,000 / 5,000 = 0.4. This means that the payback period is 2 years and 40% of the third year, or approximately 2.4 years.

This problem has been solved

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