Cheryl Peck purchased a computer network for her classroom. The computer network cost $100,000. She estimates that she can charge $500 for one session in the classroom. Cheryl knows that enrollment will increase over time. She estimates 50 students the first year, 75 students the second year, 100 students the third year, and 150 students the fourth year. If her cost of capital is 12 percent, what is the approximate payback period for this investment?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it takes for the initial investment to be recovered through the cash inflows. The cash inflow per year can be calculated by multiplying the number of students by the charge per session. - Year 1: 50 students * $500 = $25,000- Year 2: 75 students * $500 = $37,500- Year 3: 100 students * $500 = $50,000- Year 4: 150 students * $500 = $75,000Adding these inflows cumulatively until the initial investment of $100,000 is recovered:- End of Year 1: $25,000- End of Year 2: $25,000 + $37,500 = $62,500- End of Year 3: $62,500 + $50,000 = $112,500By the end of Year 3, Cheryl has recovered her initial investment. Therefore, the payback period is within the third year, making option B (2.75 years) the closest approximation.

Cheryl Peck Purchased a Computer Network for Her Classroom