Mustapha is evaluating an
investment of $5m into a project that promises the following cash inflows
Year 1 $1850000
|
Year 2 $1650000
|
Year 3 $1400000
|
Year 4 $980000
|
Year 5 $720000
|
Year 6 $520000
|
If Mustapha expects a rate of
return of 11% per annum, determine the payback period of the investment.
Suggested solution
From the table above, we see
that the inflow of year5 is more than the balance remaining to payback fully
the capital outlay as at year4. All we need to get is the time when the balance
is nil. To get this we need to prorate the balance in year5 to get the point
where the balance ought to be zero. This we do as follows:
As can be seen in the table
above, the project will payback fully after 5 years and 9 months.
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