The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 54,000 $ 4,000 2 $ 4,000 $ 8,000 3 $ 16,000 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. 2. Would the payback period be affected if the cash inflow in the last year were several times as large?

1. 4.65 years

2. No

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $58,000 ($54,000 + $4,000)

In year 1 = $4,000

In year 2 = $8,000

In year 3 = $16,000

In year 4 = $17,000

In year 5 = $20,000

In year 6 = $18,000

And so on

If we sum the first 4 year cash inflows than it would be $45,000

Now we deduct the $45,000 from the $58,000, so the amount would be $13,000 as if we added the fifth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $20,000

So, the payback period equal to

= 4 years + $13,000 : $20,000

= 4.65 yeas

In 4.65 yeas, the invested amount is recovered.

2. No it does not affected as the initial amount is recovered in less than five year