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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Payback Period

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

  1. a. Colby Hepworth has just invested $400,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment.
  2. b. Kylie Sorensen has just invested $1,400,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $700,000, $420,000, and $280,000.
  3. c. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year.
  4. d. Rahn Booth invested $1,300,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years.

Required:

  1. 1. What is the payback period for Colby?
  2. 2. What is the payback period for Kylie?
  3. 3. How much did Carsen invest in the project?
  4. 4. How much cash does Rahn receive each year?

1.

To determine

Compute payback period for Person C.

Explanation

Payback Period:

The time taken by an investment to recover its original value is known as payback period. It is calculated by dividing the original amount of investment by annual cash flow from the investment.

Use the following formula to calculate payback period:

Paybackperiod=OriginalinvestmentAverageannu

2.

To determine

Find out the payback period for Person K.

3.

To determine

Find out the investment by Person C.

4.

To determine

Find out the amount of cash received by Person R every year.

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