Beyer Company is considering the purchase of an asset for $400,000. t is expecte

Question

Beyer Company is considering the purchase of an asset for $400,000. t is expected to produce the following net cash flows. The cash flows occur evenly within each year Year ear Net cash$8,000 s80,000 S70, 000 s200,000 $15,000 $445,000 flows Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.) Cash inflow Year(Outflow) Cumulative Net Cash Inflow (Outflow) 400,000 0 S (400,000) 80,000 80,000 70,000 200,000 15,000

Explanation / Answer

Payback Period = A +

B

C

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

The following table shows the calculations

So, as per above calculations, Payback period

= 3 + |(170,000)| / 200,000

= 3 + 0.85

= 3.85 Years

Payback Period = A +

B

C

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