Boakye a fresh graduate from Kwadaso Agric college 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 Steve Ghc40000. The year end cash flows from the two farms are shown in the table below. Assume time value of money is not consideredPeriod123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000 The payback period for the pig farming business is Blank 1. Fill in the blank, read surrounding text. years
Question
Boakye a fresh graduate from Kwadaso Agric college 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 Steve Ghc40000. The year end cash flows from the two farms are shown in the table below. Assume time value of money is not consideredPeriod123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000 The payback period for the pig farming business is Blank 1. Fill in the blank, read surrounding text. years
Solution
The payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment. It is calculated by dividing the initial investment by the annual cash inflow.
For the pig farming business, the initial investment is Ghc 105,000. The annual cash inflows are as follows:
Year 1: Ghc 25,000 Year 2: Ghc 45,000 Year 3: Ghc 40,000 Year 4: Ghc 20,000 Year 5: Ghc 19,000
To calculate the payback period, we add the cash inflows until the total equals or exceeds the initial investment.
Year 1: Ghc 25,000 Year 2: Ghc 25,000 + 45,000 = Ghc 70,000 Year 3: Ghc 70,000 + 40,000 = Ghc 110,000
By the end of Year 3, the total cash inflow is Ghc 110,000, which is more than the initial investment of Ghc 105,000. Therefore, the payback period for the pig farming business is 3 years.
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