It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a year for three years. After the three years, the cart is expected to be worthless as that is the expected life of the
Heating system. What is the payback period of the hot dog cart?
A) .87 year
B) .92 year
C) 1.03 year
D) 1.09 year
E) 1.14 year

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for the initial investment to be paid back through cash flows. 
Annual net cash flow = Annual sales revenue - Annual operating costs
Annual net cash flow = $16,200 - $0 (no mention of operating costs)
Annual net cash flow = $16,200

Payback period = Initial investment / Annual net cash flow
Payback period = $14,900 / $16,200
Payback period = 0.9197 or approximately 0.92 years

Therefore, the best choice is B because it provides the correct payback period for the hot dog cart.

It Will Cost $14,900 to Acquire a Hot Dog Cart