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Payback Period Questions

The document contains 7 questions about calculating and applying payback periods to evaluate investment projects. It provides cash flow information for various hypothetical projects and asks about computing payback periods, determining if projects should be accepted or rejected based on payback period criteria, and calculating missing cash flows given other payback period information.

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pareekrishika34
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35 views

Payback Period Questions

The document contains 7 questions about calculating and applying payback periods to evaluate investment projects. It provides cash flow information for various hypothetical projects and asks about computing payback periods, determining if projects should be accepted or rejected based on payback period criteria, and calculating missing cash flows given other payback period information.

Uploaded by

pareekrishika34
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Q1.

Suppose a firm is considering investing in a project with the cash flows shown below,
that the required rate of return on projects of this risk class is 7 percent, and that the
maximum allowable payback and discounted payback statistics for the project are 3.5 and
4.5 years, respectively.

Time 0 1 2 3 4 5 6

$1,67
Cash flow $5,000 $1,270 $2,470 $1,590 $1,470 $1,270
0
Use the payback decision rule to evaluate this project. (Round the answer to 2 decimal
places.) Should it be accepted or rejected?

Q2. Quary Company is considering an investment in machinery with the following


information.

Initial investment - $209,000

Useful life - 9 years

Salvage value - $20,000

Expected sales per year - 10,450 units

Materials, labor, and overhead (except depreciation) - $47,025

Depreciation-Machinery - 21,000

Selling, general, and administrative expenses - 5,225

Selling price per unit - $10

A) Compute the investment's annual income and annual net cash flow.

B) Compute the investment's payback period.

Q3. An investment project provides cash inflows of $1,150 per year for eight years. What is
the project payback period if the initial cost is $3,850?

Compute the payback period statistic for Project X and recommend whether the firm should
accept or reject the project with the cash flows below if the maximum allowable payback is
four years.

Year 0 - -$1,450

Year 1 - $250

Year 2 - $380

Year 3 - $620

Year 4 - $1,000

Year 5 - $100

Q4. Consider a project with the cash flows listed in the table below. What is the project's
payback period?
Year Cash Flow

0 -8,500

1 1,400

2 1,300

3 1,200

4 1,300

5 1,500

6 1,800

7 2,200

8 2,700

Q5. A company is determining whether to invest in a project of limited duration. The cash
flows that correspond to the project are as follows:

Annual Cash Flows

Year
$200,000
1

Year
$200,000
2

Year
$200,000
3

Year
$200,000
4

Year
$200,000
5
The payback period has been determined to be three and one-half years.

What is the amount of the initial investment?

Q6. The payback period is 3.5 years. The net investment is $550,000 at the beginning of the
investment. Cash flows are $200,000 for Year 1, $100,000 for Year 2, $100,000 for Year 4,
and $50,000 for Year 5.

Calculate the missing Year 3 cash flow based on the following information.

Q7. A project has an initial cost of $60,000, expected net cash inflows of $10,000 per year for
8 years, and a cost of capital of 12%. What is the project's discounted payback period? Show
your work.

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