Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c }
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500
\end{array}$$
A) 2.15 years
B) 1.70 years
C) 2.11 years
D) 1.81 years
E) 2.45 years

Question

Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500
\end{array}$$
A) 2.15 years
B) 1.70 years
C) 2.11 years
D) 1.81 years
E) 2.45 years

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. Here, the initial investment is $1,075. In the first year, $500 is recouped, and in the second year, another $500 is recouped, totaling $1,000 at the end of year 2. To recoup the remaining $75, it will take 0.15 years (since $500 per year is being recouped, $75 is 15% of $500). Therefore, the total payback period is 2 years + 0.15 years = 2.15 years.

Taggart Inc Year 0123 Cash flows −$1,075$500$500$500\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500\end{array} Year Cash flows ​0−$1,075​1$500​2$500​3$500​​

Taggart Inc $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500\end{array}$