Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: $\begin{array}{ccccc}
\text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000
\end{array}$ Using the incremental approach, the payback period for the investment is:

Question

Quizplus · Accepted Answer

The incremental approach involves calculating the net cash inflow each year until the initial investment is recovered.

Year 1: $4,000
Year 2: $5,000
Year 3: $6,000
Year 4: $8,000
Year 5: $3,000

Adding up the cash inflows, we get a total of $26,000. This means the payback period is the time it takes to recover the initial investment of $16,000.

Payback period = Year of initial investment + (Unrecovered investment at start of year / Cash inflow during year)

Payback period = 3 + ((16,000 - 15,000) / 6,000)

Payback period = 2.4 years

Therefore, the best choice is C, as it is the correct payback period for this investment.

Mendez Company Is Considering a Capital Project That Costs $16,000