Logan Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available:
-Calculate the payback period for Investment B.

Question

Logan Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available:  
-Calculate the payback period for Investment B.

Quizplus · Accepted Answer

The payback period for Investment B can be calculated as follows:

Initial Investment = $200,000
Annual Cash Inflows = $75,000

Year 1: $75,000
Year 2: $75,000
Year 3: $50,000 ($200,000 - $150,000 = $50,000)

The payback period is the time required for the initial investment to be recouped from the cash inflows. In this case, it is 3 years.

Comparing this to Investment A, which has a payback period of 5 years, Investment B would be the better choice as it generates cash inflows faster and allows the company to recoup their initial investment sooner. However, other factors such as net present value, internal rate of return, and overall profitability should also be considered before making a final decision.

Logan IncIs Evaluating Two Possible Investments in Depreciable Plant Assets