McClaren Inc. is considering a $400,000 investment in new equipment that is anticipated to produce the following net cash inflows: $\begin{array}{lr}
\text { Year: } &\text { Net Cash} \
&\text { Inflows } \
1 & \$ 100,000 \
2 & 200,000 \
3 & 50,000 \
4 & 60,000 \
5 & 140,000
\end{array}$ If cash flows occur evenly throughout a year, the equipment's payback period is:

Question

Quizplus · Accepted Answer

To calculate payback period, we need to determine how long it takes to recover the initial investment. We can determine this by adding up the net cash inflows each year until the sum equals the initial investment of $400,000.

Year 1: $100,000
Year 2: $200,000
Year 3: $50,000
Year 4: $60,000
Total cash inflows: $410,000

Therefore, the payback period would be 3 years and 10 months ($350,000 in 3 years + $60,000 in the 10th month of year 4).

Thus, the best choice is C with a payback period of 3 years, 10 months.

McClaren Inc If Cash Flows Occur Evenly Throughout a Year, the Equipment's