The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
| Year | Investment | Cash Inflow | ||
| 1 | $ | 76,000 | $ | 5,000 |
| 2 | $ | 3,000 | $ | 10,000 |
| 3 | $ | 18,000 | ||
| 4 | $ | 19,000 | ||
| 5 | $ | 22,000 | ||
| 6 | $ | 20,000 | ||
| 7 | $ | 18,000 | ||
| 8 | $ | 16,000 | ||
| 9 | $ | 15,000 | ||
| 10 | $ | 15,000 | ||
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 | $ | 76,000 | $ | 5,000 | $ | 71,000 |
| 2 | $ | 3,000 | $ | 10,000 | $ | 64,000 |
| 3 | $ | 18,000 | $ | 46,000 | ||
| 4 | $ | 19,000 | $ | 27,000 | ||
| 5 | $ | 22,000 | $ | 5,000 | ||
| 6 | $ | 20,000 | $ | 0 | ||
| 7 | $ | 18,000 | $ | 0 | ||
| 8 | $ | 16,000 | $ | 0 | ||
| 9 | $ | 15,000 | $ | 0 | ||
| 10 | $ | 15,000 | $ | 0 | ||
The investment in the project is fully recovered in the 6th year. To be more exact, the payback period is approximately 5.2 years [= 5 + ($5,000 ÷ $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.
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