AMP Inc has invested 2165800 on equipment The firm uses payb

AMP, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $433,386, $512,178, $563,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period?

Solution

we know that

amount of investment =2,165,800

The payback period is the length of time required to recover the cost of an investment

and total cash inflow=433,386+512,178+563,755+764,997

=2,274,316

which is greater than investment cost on equipment

so company requires 4 years to recover investment cost

payback period is 4 years

so firm will accept project