The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):
A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. The annual cash inflow is the net operating income plus depreciation ($66,000 + $31,000 = $97,000). The payback period is $263,000 / $97,000 ≈ 2.7 years.

The Management of Lanzilotta Corporation Is Considering a Project That