Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Question

Quizplus · Accepted Answer

To calculate payback period, we need to determine how long it takes for a project to generate enough cash flows to recover the initial investment.

Year 0: -$170,000 (initial investment)
Year 1: $50,000
Year 2: $60,000
Year 3: $80,000
Year 4: $90,000

We start by subtracting the Year 1 cash flow from the remaining initial investment:
$170,000 - $50,000 = $120,000

We then subtract the Year 2 cash flow from the remaining investment:
$120,000 - $60,000 = $60,000

Finally, we subtract the Year 3 cash flow from the remaining investment:
$60,000 - $80,000 = -$20,000

Because we "pay back" the initial investment in Year 3, plus a portion of Year 4, the payback period is 2 years and 10 months, or 2.30 years.