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29 November, 03:51

Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Annual Net Cash Flows Year 1 $40,000 Year 2 $40,000 Year 3 $35,000 Year 4 $35,000 Year 5 $30,000 Compute the payback period for this investment. (Round to two decimal places.)

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  1. 29 November, 04:01
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    2.57 years

    Explanation:

    In the payback, we're calculating how many years the money spent is recovered. The formula below shows:

    In year 0 = $100,000

    In year 1 = $40,000

    In year 2 = $40,000

    In year 3 = $35,000

    In year 4 = $35,000

    In year 5 = $30,000

    If we sum the first 2 year cash inflows than it would be $80,000

    If we add the first 2-year cash inflows, it would be $80,000 Now we subtract the $80,000 from the $100,000, so the amount would be $20,000 as if we added the third-year cash inflow to the initial investment. So, we deduct it

    And, the next year cash inflow is $35,000

    Therefore, the payback period would be

    = 2 years + $20,000 : $35,000

    = 2.57 years
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