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 afterminustax cash flow will increase 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?

6 years

Explanation:

The Payback period calculates how much it takes the amount invested in a project to be recovered from the cumulative cash flow.

Total amount invested =  $500,000 +  $100,000 =  $-600,000

Cash inflow in year 2 =  $100,000

Amount recovered in year 2 = $-600,000 + 100,000 = $-500,000

Cash inflow in year 3 =  $100,000 × 1.1 = 110,000

Amount recovered in year 3=$-500,000 + 110,000 = $-390,000

Cash inflow in year 4= $121,000

Amount recovered in year 4 = $-390,000 + $121,000 = $-269,000

Cash inflow in year 5= $133,100

Amount recovered in year 5 = $-269,000 + $133,100 = $-135,900

Cash inflow in year 6 = $146,410

Amount recovered in year 6 = $146,410 $-135,900 = $10,510

The amount is recovered In 5.93 years

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