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Chapter 26: Q9RQ (page 1463)

How is payback calculated with unequal net cash inflows?

Short Answer

Expert verified

Answer

Payback Period = Initial Investment / Net Cash Flow per period

Step by step solution

01

Meaning of Payback Period

The payback period is the time it takes to recover the initial expense. It is the sum of a long time taken to recover the unique consumption of a project. Consequently, the companies can use the payback period to compare projects in capital arrangements and evaluate the time it takes for the initial venture to recover in years.

02

Calculation of payback with unequal net cash inflows

The payback period (in years) of an investment is computed as followsif net cash inflows are unequal:

Before complete recovery, add the cumulative net cash inflows for full years.

Payback=Numberoffullyearbeforerecovery+UnrecovedcostatthestartofyearCashflowduringtheyear

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Most popular questions from this chapter

You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(215,000 per year for the next 40 years (based on family history, you think you will live to age 80). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.

Requirements

1. How much money must you accumulate by retirement to make your plan work? (Hint:Find the present value of the \)215,000 withdrawals.)

2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?

What is the decision rule for NPV?

Hudson Manufacturing is considering three capital investment proposals. At this time, Hudson only has funds available to pursue one of the three investments.

Equipment A

Equipment B

Equipment C

Present value of net cash inflows

\(1,647,351

\)1,969,888

\(2,064,830

Initial investment

(1,484,100)

(1,641,573)

(1,764,812)

NPV

\)163,251

\(328,315

\)300,018

Which investment should Hudson pursue at this time? Why?

Question: What is an annuity? How does it differ from a lump sum payment?

Using IRR to make capital investment decisions

Refer to the data regarding Hawkins Products in Exercise E26-25. Compute the IRR of each project, and use this information to identify the better investment.
See all solutions

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