McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c }
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500
\end{array}$$
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Question

McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500
\end{array}$$
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. Here, after 2 years, $1,000 ($500 in Year 1 + $500 in Year 2) of the initial $1,150 investment is recovered. In Year 3, the project generates another $500, but only $150 is needed to fully recover the initial investment. The fraction of the year needed to earn the remaining $150 is $150/$500 = 0.3. Therefore, the payback period is 2 years + 0.3 = 2.3 years.

McGlothin Inc Year 0123 Cash flows −$1,150$500$500$500\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array} Year Cash flows ​0−$1,150​1$500​2$500​3$500​​

McGlothin Inc $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array}$