Acompany is considering two capital investments. each requires an initial investment of $15,000 and has a 4 year useful life. investment a has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. investment b has the following expected cash flows: year 1: $8,000; year 2: $6,000; year 3: $4,000; year 4: $2,000; total cash flows: $20,000. calculate the payback period for investment a.

3 years

Explanation:

The computation of the payback period is shown below:

Payback period = Initial investment ÷ Net cash flow

where,  

Initial investment is $15,000

And, the net cash flow would be

= Year 1 + year 2 + year 3 + year 4

= $5,000 + $5,000 + $5,000 + $5,000

= $20,000

As we see that the net cash flow is recovered in three years that means net cash flows and the initial investment are equal

So,

Payback period would be

= $15,000 ÷ $15,000

= 3 years

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