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The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $66,000 $5,000 2 $6,000 $10,000 3 $20,000 4 $17,000 5 $20,000 6 $18,000 7 $16,000 8 $14,000 9 $13,000 10 $13,000 Required: 1
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Year Investment Cash Inflow 1 $66,000 $5,000 2 $6,000 $10,000 3 $20,000 4 $17,000 5 $20,000 6 $18,000 7 $16,000 8 $14,000 9 $13,000 10 $13,000
Required: 1. Determine the payback period of the investment. (Round your answer to 1 decimal place.)
Payback period
?
I years
2. Would the payback period be affected if the cash inflow in the last year was several times as large?
0 Yes 0 No
Expert Solution
| Computation of Payback Period: | ||
| Year | Cash flow | Cumulative cash flow |
| 1 | -61000 | -61000 |
| 2 | 4000 | -57000 |
| 3 | 20000 | -37000 |
| 4 | 17000 | -20000 |
| 5 | 20000 | 0 |
| 6 | 18000 | 18000 |
| 7 | 16000 | 34000 |
| 8 | 14000 | 48000 |
| 9 | 13000 | 61000 |
| 10 | 13000 | 74000 |
| Computation of Payback Period: | ||
| Year | Cash flow | Cumulative cash flow |
| 1 | =-66000+5000 | =-61000 |
| 2 | =-6000+10000 | =-61000+4000 |
| 3 | 20000 | =-57000+20000 |
| 4 | 17000 | =-37000+17000 |
| 5 | 20000 | =-20000+20000 |
| 6 | 18000 | =18000+0 |
| 7 | 16000 | =18000+16000 |
| 8 | 14000 | =34000+14000 |
| 9 | 13000 | =48000+13000 |
| 10 | 13000 | =61000+13000 |
So, Payback period is 5 years.
Change in cash flow in last year's amount will have no effect on payback period. So, payback period would not be affected if the cash inflow in the last year were several times as large.
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