Exercise 11-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 60,000 $ 40,000 $ 70,000 $ 125,000 $ 35,000 $ 330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

The Payback period for this investment is 3.08 years

Explanation:

In order to calculate the payback period for this investment we would have to calculate first the cumulative cash inflow as follows:

Year    cash inflow       cumulative cash inflow         calculation

1           $ 60,000             $ 60,000                             $ 60,000

2          $ 40,000              $100,000                           $ 40,000+$ 60,000

3         $ 70,000              $ 170,000                            $ 70,000+$100,000

4         $ 125,000            $295,000                           $ 125,000+$ 170,000  

5          $ 35,000             $330,000                            $35,000+$295,000

The total cash inflow from the project is $330,000

Therefore, Calculation of payback period=3 years+((180,000-170,000)%$125,000)

=3 years+($10,000%$125,000)

=3 years+0.08

=3.08 years

Payback period for this investment is 3.08 years