Exercise 11-1 Payback Method [L011-1] The management of Unter Corporation, an ar

Question

Exercise 11-1 Payback Method [L011-1] The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows Year Investment Cash Inflow $54,000 7,000 $5,000 10,000 16,000 17,000 20,000 18,000 16,000 $14,000 $13,000 13,000 6 10 Required: 1. Determine the payback period of the investment. (Round your answer to 1 decimal place.) Payback period years 2. Would the payback period be affected if the cash inflow in the last year were several times as large? Yes O No

Explanation / Answer

1. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 4 + ( 13,000 / 20,000)

= 4.65 Years

Hence the correct answer is 4.65Years

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2. No.

This is because the payback period is less than the last year of the cash flow and hence the cash flow in the last year would have no impact on the payback period.

Year Investment Cash Inflow Net Cash Flow 1 -54,000 5,000 -49,000 (Investment + Cash Inflow) 2 -7,000 10,000 -46,000 (Net cash Flow +Investment + Cash Inflow) 3 -    16,000 -30,000 (Net Cash Flow + Cash Inflow) 4 -    17,000 -13,000 (Net Cash Flow + Cash Inflow) 5 -    20,000 7,000 (Net Cash Flow + Cash Inflow) 6 -    18,000 25,000 (Net Cash Flow + Cash Inflow) 7 -    16,000 41,000 (Net Cash Flow + Cash Inflow) 8 -    14,000 55,000 (Net Cash Flow + Cash Inflow) 9 -    13,000 68,000 (Net Cash Flow + Cash Inflow) 10 -    13,000 81,000 (Net Cash Flow + Cash Inflow)

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