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DYI Construction Co. is considering a new inventory system that will cost​ $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of​ $350,000 in year​ one, $325,000 in year​ two, $150,000 in year​ three, and​ $180,000 in year four.​ DYI's required rate of return is​ 8%. What is the payback period of this​ project?

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cecylya

Answer:

Payback is in period 3

Explanation:

We use a cash flow to solve this problem.  File with Cash flow is attached.

At moment 0 we have the investment cost , in this case $750,000. From period 1 to period 4, we have different incomes. Then, we calculate the Net cash flow that is the difference between benefits and cost.

Payback is the moment when  cumulative Cash Flow are higher than 0. In this case,  period 3.

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