Beyer Company is considering the purchase of an asset for $190,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4 Year 5 Total
Net cash flows $50,000 $31,000 $60,000 $140,000 $30,000 $311,000
Compute the payback period for this investment.

Pay back period =3 years 4 months

Explanation:

The payback period is the estimated length of time it takes cash inflow from a project to recoup the cash outflow.  

The payback period uses cash flows and not profit.

The payback period can be determined by accumulation the cash inflow consecutively to ascertain the length of time it will take the sum to equate the initial cost.

This will be done as follows:

The sum of the cash in flows for the first three years would equal

50,000 + $31,000 + $60,000 = 141,000

The balance required to equate 190,000 would be

balance = 190,000 - 140,000 = 50,000

Pay back period = 3 years + (50,000/140,000)× 12 months

                            = 3 years 4 months

Pay back period =3 years 4 months

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