The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

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?

Explanation

1.

The payback period is determined as follows:

Year	Investment		Cash Inflow		Unrecovered Investment
1	$	54,000	$	4,000	$	50,000
2	$	4,000	$	8,000	$	46,000
3			$	16,000	$	30,000
4			$	17,000	$	13,000
5			$	20,000	$	0
6			$	18,000	$	0
7			$	16,000	$	0
8			$	14,000	$	0
9			$	13,000	$	0
10			$	13,000	$	0

The investment in the project is fully recovered in the 5th year. To be more exact, the payback period is approximately 4.7 years [= 4 + ($13,000 ÷ $20,000)].

2.

Because the investment is recovered prior to the last year, the amount of the cash inflow in the last year has no effect on the payback period.

Thank you!