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26 May, 01:49

The Seattle Corporation has an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost $150,000 today, and the firm's WACC is 10%. What is the payback period for this investment?

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  1. 26 May, 03:26
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    4.86 years

    Explanation:

    Data provided in the question:

    Cash flow each year from year 1 to year 4 = $30,000

    Cash flow in year 5 through 9 = $35,000

    Cash flow in year 10 = $40,000

    Initial investment = $150,000

    Firm's WACC = 10%

    Now,

    Accumulated cash flow for 4 years = $30,000 * 4 = $120,000

    Accumulated Cash flow for 5 years = $120,000 + $35,000

    = $155,000 > amount invested ($150,000)

    Thus,

    Remaining payback amount required in year 5 = $150,000 - $120,000

    = $30,000

    Payback period for $30,000 in year 5 = [$30,000 : Annual cash flow]

    = $30,000 : $35,000

    = 0.86 years

    Hence,

    Total payback period for this investment is

    = 4 years + 0.86 years

    = 4.86 years
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