Answered: Shirt Corporation is considering…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 26BEB

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Problem 6 - Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide

the following cash inflows over its five-year useful life:

Year	Cash Inflow
1	$18,000
2	$22,000
3	$24,000
4	$16,000
5	$ 9,000

Calculate the payback period for this investment.

Expert Solution

Step 1 Concept

The Payback period is a period in which project return back the investment amount which is invested at the time of investment or initiating the project.

When equal annual cash inflow :

$P a y b a c k P e r i o d = [\frac{I n v e s t m e n t \cos t}{E q u a l a n n u a l c a s h i n f l o w}]$

But in this question unequal annual cash flow is given therefore we will find the payback period by different method by calculating the cumulative cash inflow.

Step 2 Calculation of Pay Back Period (PBP)

Year	Cash Flow	Cumulative CF
0	-60000.00	-60000.00
1	18000.00	-42000.00
2	22000.00	-20000.00
3	24000.00	4000.00
4	16000.00	20000.00
5	9000.00	29000.00

Pay Back Period = [ 2 + (20000 / 24000) ]

Pay Back Period = 2.8333 Years

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