Calculation of the Payback Period to Formulate an Investment Decision (Essay Sample)
the was based on the calculation of the payback period, Net present value, and the internal rate of return of the two machines and recommending the machine to invest on.
source..
Investment Decision
Student's Name
Institutional Affiliation
Course Name and Number
Instructor's Name
Date
Payback Period of Each Project
Packaging Machine
Initial cost=$14000
Year
Cashflows
Cumulative cashflows
1
4100
4100
2
3300
7400
3
2900
10300
4
2200
12500
5
1200
13700
Payback period=5+(14000-13700)/1200
= 5.25years
Molding Machine
Initial cost=$12000
Year
Cashflows
Cumulative cashflows
1
3200
3200
2
2800
6000
3
2800
8800
4
2200
11000
5
2200
13200
Payback period=4 years + (12000-11000)/2200
=4.45 years
Payback period may be defined as the time initial cost of investment is anticipated to be recovered by the cashflows from the investment (Lin, 2010). Each year project’s cashflows do not depict annuity, therefore, the payback period is calculated by calculating the cumulative cashflows and the payback period then would be dividing the current cashflow remaining to full recovery by cashflows of the year during the full recovery plus the year before full recovery
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