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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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An investment of $1,000 produces a net cash inflow of $500 in the first year and $750 in the second year. What is the payback period?

  1. a. 1.67 years
  2. b. 0.50 year
  3. c. 2.00 years
  4. d. 1.20 years
  5. e. Cannot be determined

To determine

Find out the payback period where the investment is of $1,000 and cash inflow for first and second year are $500 and $750 respectively.

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.

Calculate payback period:

Year

Unrecovered investment($)

(Beginning of year)

Annual cash

Flow($)

Time needed for payback

(Years)

11,0005001.0
2$5007500.671
   1.67 years

Table (1)

Therefore, a is the correct option.

Working Note:

1. Calculation of payback period for year 2:

Paybackforsecondyear=<

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