A company is considering the purchase of a new piece of equipment for $117,200. Predicted annual cash inflows from this investment are $53,000 (year 1), $21,500 (year 2), $26,500 (year 3), $20,500 (year 4) and $23,000 (year 5). The payback period is:

3.79 years

Explanation:

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

In year 0 = $117,200

In year 1 = $53,000

In year 2 = $21,500

In year 3 = $26,500

In year 4 = $20,500

In year 5 = $23,000

If we sum the first 3 year cash inflows than it would be $101,000

Now we deduct the $101,000 from the $117,200, so the amount would be $16,200 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $20,500

So, the payback period equal to

= 3 years + $16,200 : $20,500

= 3.79 years

In 3.79 years, the invested amount is recovered.