Question

"Vulcan Materials Company is considering an investment that will have an initial cost of $8,500 but is expected to produce net cash flows of $1,400, $2,300, $3,100, and $2,000 over the next four years, respectively. Determine Vulcan's payback period."

Answer 1

3.85 years

Step-by-step explanation:

The payback period is the time that a company takes to recover its initial investment. Considering an initial investment of $8,500, and that cash flows are evenly distributed within each year, the payback period can be found by:

`\begin{array}{ccc}\ year&cash\ flow&balance\\1&\$1,400&-\$7,100\\2&\$2,300&-\$4,800\\3&\$3,100&-\$1,700\\4&\$2,000&\$300\end{array}`

The payback period occurs sometime between years 3 and 4. The fraction of year 4 needed to reach payback is:

`f=(\$2,000-\$300)/(\$2,000)\\f= 0.85`

The company needs 3 years and 0.85 of the fourth year to break even. Therefore, the payback period for Vulcan Materials Company is 3.85 years.