Ribelin Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period? A. 856 years B. 10.42 years C. 10.00 years D. 11.17 years

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Business

Teresa

22 October, 17:02

Ribelin Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period? A. 856 years B. 10.42 years C. 10.00 years D. 11.17 years

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Answers (1)

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Sunny · Answer 1

C. Payback is 10 years

Explanation:

Payback is the number of years it will takes to recover the initial investment, which in this case translates to: how long will it take for Ribelin Corpration to recover the $218,000 investment given the stated cash-flows.

Year Cash-flow Balance

0 (218,000.00) (218,000.00)

1 32,000.00 (186,000.00)

2 18,000.00 (168,000.00)

3 21,000.00 (147,000.00)

4 21,000.00 (126,000.00)

5 21,000.00 (105,000.00)

6 21,000.00 (84,000.00)

7 21,000.00 (63,000.00)

8 21,000.00 (42,000.00)

9 21,000.00 (21,000.00)

10 21,000.00 -

11 21,000.00 21,000.00

12 21,000.00 42,000.00

By end of year 10, total inflows are exactly equal the initial investment, therefore it will take them 10 years