Answer:
a. 6.0 years
b. 5.0 years
Explanation:
Payback period is the time required for the initial investment to be completely paid off, that is, cumulative cash flow = initial investment.
Investment = $1,200,000
a.) With even cash flows of $200,000, the payback time is:
[tex]PB = \frac{\$1,200,000}{\$200,000} \\PB = 6\ years[/tex]
b.) If cash flows have the following pattern:
Year 1: $150,000
Year 2: $150,000
Year 3: $400,000
Year 4: $400,000
Year 5: $100,000.
Payback period will at occur when the cumulative cash flow equals $1,200,000
[tex]CF_1 = \$150,000\\CF_2 = \$150,000+\$150,000=\$300,000\\CF_3 = \$300,000+\$400,000 =\$700,000\\CF_4 = \$700,000+\$400,000 =\$1,100,000\\CF_5 = \$1,100,000+\$100,000 =\$1,200,000\\PB=5\ years[/tex]
