Question

disintegration, inc. is considering a long-term investment. the investment will require an investment of $72,000. it will have a useful life of 5 years, and no salvage (i.e., ending) value. annual cash savings from the investment are $40,000, and annual cash outflows are $16,000. assume that cash flows other than the initial investment occur evenly throughout the year. what is the payback period?

Answer 1

The cash rate of return for this investment is determined by dividing the $125,190 upfront investment by the net gain in cash flow over period.

How long is the cash-back period?

The Payback is the amount of time that is required for a project to generate enough cash flow to pay for itself completely. When calculating the payback period, you would forecast the profitability for the asset, project, or business.

Briefing

Cash Payback Period = Initial Investment /Net increase Cash Flow per Period

Net cash flow improvement for the period = $79,000 - $40,000 = $39,000

Cash payback period is 3.21 years ($125,190/$39,000)

The project's $125,190 initial investment would be repaid in 3 years, 2.5 months (0.21 x 12 months).

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