Assuming $1m is invested to yield the following cash inflows:
Year1-$100000, Year2-$200000, Year3-$600000, Year4-$400000 and
Year5-$150000
How long will it take the project to payback?
Suggested Solution
To get the length of time (in years) it takes to payback this
investment, we arrange the cash inflows in a tabular form in such a way that
for every year, we get the balance outstanding after an inflow is received.
This is demonstrated in the table below.
From the table above, we see that the inflow of year4 is more than the
balance remaining to payback fully the capital outlay. Recall we need to get
the point where the balance is nil. To get this we need to prorate the balance
in year4 to get the point where the balance ought to be zero. This we do as
follows:
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