Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 10,000 & \$ 12,000 \
\text { Year 2 } & \$ 12,000 & \$ 11,000 \
\text { Year 3 } & \$ 15,000 & \$ 12,000 \
\text { Year 4 } & \$ 20,000 & \$ 12,000 \
\text { Year 5 } & \$ 22,000 & \$ 12,000 \
\text { Year 6 } & \$ 25,000 & \$ 15,000 \
\text { Year 7 } & \$ 25,000 & \$ 15,000 \
\text { Year 8 } & \$ 25,000 & \$ 15,000
\end{array}$
-Refer to the Figure.Assume a straight-line depreciation over eight years.What would be the payback period for the project?

Question

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
 $\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 10,000 & \$ 12,000 \
\text { Year 2 } & \$ 12,000 & \$ 11,000 \
\text { Year 3 } & \$ 15,000 & \$ 12,000 \
\text { Year 4 } & \$ 20,000 & \$ 12,000 \
\text { Year 5 } & \$ 22,000 & \$ 12,000 \
\text { Year 6 } & \$ 25,000 & \$ 15,000 \
\text { Year 7 } & \$ 25,000 & \$ 15,000 \
\text { Year 8 } & \$ 25,000 & \$ 15,000
\end{array}$
-Refer to the Figure.Assume a straight-line depreciation over eight years.What would be the payback period for the project?

Quizplus · Accepted Answer

The payback period is calculated by adding the net cash flows until the initial investment is recovered. Given the straight-line depreciation and the cash revenues, the depreciation does not directly affect the cash flow calculation for payback period. The cash revenues are added cumulatively until they exceed the initial investment of $30,000. Summing up the cash revenues: Year 1: $10,000, Year 2: $22,000 (cumulative), Year 3: $37,000 (cumulative). The investment is recovered between Year 3 and Year 4, hence the correct answer is between 4 and 5 years.

Cary Swenson Is Considering Investing $30,000 in a Project with the Following