Question

It will cost $2,500 to acquire an ice cream cart. Cart sales are expected to be $1,500 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period?

Answer 1

Answer: 1 year and 6 months

Explanation:

The cash flows are as follows,

Year 0 = ($2,500)

Year 1 = $1,500

Year 2 = $1,500

Year 3 = $1,500

Payback period is the time it will take to break even the intial investment (In this question the initial investment is $2,500)

The sum of the cashflows of year1 and year2 is equal to $3,000

which means that the payback period is somewhere bbetween year 1 and year2

1500/3000 = 0.5 year or 6 months

the total payback period is 1 year and 6 months