Asked by Allysa Restaino on Jul 17, 2024
Verified
The cash payback period for this investment is
A) 4 years
B) 5 years
C) 20 years
D) 3 years
Present Value Factor
A coefficient used to calculate the present value of a future amount of money or stream of cash flows, based on a specific discount rate.
Cash Payback Period
Cash Payback Period is the amount of time it takes for an investment to generate enough cash flows to recover its initial cost.
Desired Rate
An objective or target rate, often referring to performance metrics, interest rates, or return on investment goals set by an individual or organization.
- Comprehend the process of calculating cash payback periods for capital investments and its consequences.
Verified Answer
Year 1: $100,000
Year 2: $140,000
Year 3: $160,000
Year 4: $120,000
Year 5: $90,000
To determine the cumulative cash inflows, we can add up the net cash inflows for each year until we reach the initial investment of $380,000. From the table, we can see that the cumulative net cash inflows at the end of each year are:
Year 1: $100,000
Year 2: $240,000 ($100,000 + $140,000)
Year 3: $400,000 ($100,000 + $140,000 + $160,000)
Year 4: $520,000 ($100,000 + $140,000 + $160,000 + $120,000)
Therefore, the cash payback period is 4 years (i.e. at the end of year 4, the cumulative net cash inflows equal the initial investment of $380,000). Since the cash payback period is less than the 5-year life of the investment and the company's desired rate of return is 6%, the investment is acceptable.
Learning Objectives
- Comprehend the process of calculating cash payback periods for capital investments and its consequences.
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