Chapter 8, Problem 8.2C

Summary Introduction

To determine: The payback period for the project

Introduction:

The payback period is one of the capital budgeting techniques, which refers a period needed to get back the actual investment in a project. Payback period is the period needed to generate the cash flows for an investment that are adequate to recover the primary expenses.

Answer to Problem 8.2C

The payback period for the initial investment of $3,550 is 3.55.

Explanation of Solution

Given information:

The initial investment is $3,550. The cash inflow in a year is $1000. The total period of cash flows is 8 years.

Note: Here, the cash flows are an annuity of $1000 for eight years.

Formula to calculate the payback period:

$\text{Payback period}=\frac{\text{Initial cost}}{\text{Annuity payment}}$

Compute the payback period if the initial investment is $3,550:

$\begin{array}{c}\text{Payback period}=\frac{\text{Initial cost}}{\text{Annuity payment}}\\ =\frac{\$3,550}{\$1000}\\ =3.55\text{ years}\end{array}$

Hence, the payback period for the initial investment of $3,550 is 3.55 years.