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7 February, 10:10

The Z Corporation is considering an investment with the following data (Ignore income taxes.) : Year 1 Year 2 Year 3 Year 4 Year 5 Investment $ (32,000) $ (12,000) Cash inflow $ 8,000 $ 8,000 $ 20,000 $ 16,000 $ 16,000 Cash inflows occur evenly throughout the year. The payback period for this investment is:

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  1. 7 February, 12:55
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    3.5 yeas

    Explanation:

    In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

    In year 0 = $32,000

    In year 0 = $12,000

    In year 1 = $8,000

    In year 2 = $8,000

    In year 3 = $20,000

    In year 4 = $16,000

    In year 5 = $16,000

    If we sum the first 3 year cash inflows than it would be $36,000

    Now we deduct the $36,000 from the $44,000, so the amount would be $8,000 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

    And, the next year cash inflow is $16,000

    So, the payback period equal to

    = 3 years + $8,000 : $16,000

    = 3.5 yeas

    In 3.5 yeas, the invested amount is recovered.
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