Afriyie, a fresh graduate from KNUST plans to invest in one of two animal farming business with a Ghc 1 million loan sourced from Ecobank. Investing in Pig farming will cost 105,000 while the poultry business will cost Ghc100,000. The pig farming business has a lifespan of 5 years while the poultry farm will last for 6 years. The poultry cage would be sold for a scrap which will fetch Afriyie Ghc 40000. The year end cash flows from the two farms are shown in the table below.Period123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000The payback period for the poultry farming business is Blank 1. Fill in the blank, read surrounding text.
Question
Afriyie, a fresh graduate from KNUST plans to invest in one of two animal farming business with a Ghc 1 million loan sourced from Ecobank. Investing in Pig farming will cost 105,000 while the poultry business will cost Ghc100,000. The pig farming business has a lifespan of 5 years while the poultry farm will last for 6 years. The poultry cage would be sold for a scrap which will fetch Afriyie Ghc 40000. The year end cash flows from the two farms are shown in the table below.Period123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000The payback period for the poultry farming business is Blank 1. Fill in the blank, read surrounding text.
Solution
To calculate the payback period for the poultry farming business, we need to add up the cash flows until the initial investment of Ghc100,000 is recovered.
Here's how to do it:
Year 1: Ghc30,000 Year 2: Ghc30,000 + Ghc50,000 = Ghc80,000 Year 3: Ghc80,000 + Ghc50,000 = Ghc130,000
By the end of the third year, Afriyie has recovered his initial investment of Ghc100,000. Therefore, the payback period for the poultry farming business is 3 years.
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