You are considering buying a new machinery for the factory to help boost the production for a new product line. The machinery has an estimated economic life of 8 years, and requires £ 9,000 in initial co The table below shows the estimated cashflows from the project during its life: Year & }(c) Cashflows (E) 1 & 3,000 2 & 3,000 3 & 2,000 4 & 2,000 5 & 1,000 6 & 800 7 & 600 8 & 400 What is the payback period from the project?

Question

You are considering buying a new machinery for the factory to help boost the production for a new product line. The machinery has an estimated economic life of 8 years, and requires £ 9,000 in initial co The table below shows the estimated cashflows from the project during its life: Year & }(c) Cashflows (E) 1 & 3,000 2 & 3,000 3 & 2,000 4 & 2,000 5 & 1,000 6 & 800 7 & 600 8 & 400 What is the payback period from the project?

Answer 1

The payback period of the machinery is predicted to be 4 years.

Answer 2

The payback period refers to the amount of time it takes for an investment to generate a flow of cash equal to the initial cost of the investment. For this case, the investment being a relatively expensive new machinery. This time, you're looking to earn back your initial investment of

using the annual net cash inflows the machinery can generate.Let us then calculate the cumulative annual net cash inflows and watch when it becomes equal or goes beyond the cost of the newly considered machinery (

):Year 1: £3,000Year 2: £3,000 + £3,000 = £6,000Year 3: £6,000 + £2,000 = £8,000Year 4: £8,000 + £2,000 = £10,000On Year 4, the accumulative cash inflow (£10,000) has now surpassed our initial investment of

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