Matthew Corporation is adding a new product line that will require an investment of $ 135 comma 000. The product line is estimated to generate cash inflows of $ 25 comma 000 the first year, $ 20 comma 000 the second year, and $ 15 comma 000 each year thereafter for ten more years. What is the payback period?

Question

Business

Beau

4 September, 07:28

Matthew Corporation is adding a new product line that will require an investment of $ 135 comma 000. The product line is estimated to generate cash inflows of $ 25 comma 000 the first year, $ 20 comma 000 the second year, and $ 15 comma 000 each year thereafter for ten more years. What is the payback period?

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Aditya · Answer 1

8 years

Explanation:

payback period the Time duration in which a project pays back the initial investment to the business in the form of cash flows.

Initial Investment = $135,000

First 2 years have variable cash flows

Recovered in first two years = $25,000 + $20,000 = $45,000

Remaining Balance after 2 years = 135,000 - $45,000 = $90,000

After 2 years there is is constant cash flow of $15,000

Pay back years for $90,000 = $90,000 / $15,000 = 6 years

Total Payback period = 2 years + 6 years = 8 years