Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? Initial investment = $500,000; life = five years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the initial investment and dividing it by the annual cash inflow. Here, the annual cash inflow is $160,000 (cost savings). The initial investment is $500,000. So, the payback period = $500,000 / $160,000 = 3.125 years. Since payback period doesn't account for the time value of money, salvage value, or tax effects directly in its basic calculation, the closest answer is 3.6 years (B).

Given the Following Information and Assuming Straight-Line Depreciation to Zero