It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected
Remaining life of the cooling system.What is the payback period of the ice cream cart?
A)0.86 year.
B)1.46 years.
C)1.86 years.
D)2.46 years.
E)2.86 years.

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for the initial investment to be recovered through the accumulated net cash flows.

In this case, the initial investment is £2,600 and the annual cash flow is £1,400 for three years, so the total cash flow over three years is £4,200 (£1,400 x 3).

To calculate the payback period, we need to determine how many years it takes for the cash flow to cover the initial investment. We can do this by subtracting the annual cash flow from the initial investment until the cumulative cash flow becomes positive.

Year 1: -£2,600 + £1,400 = -£1,200
Year 2: -£1,200 + £1,400 = £200
Year 3: £200 + £1,400 = £1,600

It takes until the end of year 2 for the cumulative cash flow to become positive, so the payback period is 2 years plus the remaining fraction of the initial investment in year 3 divided by the cash flow in that year.

£200 ÷ £1,400 = 0.14

2 years + 0.14 years = 1.86 years

Therefore, the payback period for the ice cream cart is 1.86 years.

It Will Cost £2,600 to Acquire a Small Ice Cream