Michigan Mattress Company is considering the purchase of land and the constructi
ID: 2666925 • Letter: M
Question
Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?Explanation / Answer
cashflow of year ===========Accumulated 0 year = (100,000)==========(100,000) 1st year = (500,000) ========(600,000) 2nd year = 100,000 =========(500,000) 3rd year = 110,000==========(390,000) 4th year = 121,000==========(269,000) 5th year = 133,100==========(135,900) 6th year = 146,410==========10,510 so pay back period is sixth year as in sixth year accumulated cashflows are positive