An investment project requires an initial investment of $100,000. The project is expected to generate net cash inflows of $28,000 per year for the next five years. These cash inflows occur evenly throughout the year. Assuming a 12% discount rate, the project's payback period is (Ignore income taxes.):
A) 0.28 years
B) 3.36 years
C) 3.57 years
D) 1.40 years

Question

Quizplus · Accepted Answer

We need to calculate the payback period of the project, which is the time it takes to recover the initial investment. To do this, we add up the net cash flows until they equal the initial investment of $100,000.

Year 0: -$100,000 (initial investment)
Year 1: $28,000
Year 2: $28,000
Year 3: $28,000
Year 4: $28,000
Year 5: $28,000

To calculate the payback period, we can start subtracting the net cash inflows from the initial investment until we reach zero.

Year 1: -$72,000
Year 2: -$44,000
Year 3: -$16,000
Year 4: $12,000
Year 5: $40,000 (exceeds initial investment)

Therefore, the payback period is between year 4 and year 5. We can estimate the exact year by using linear interpolation:

Payback year = 4 + ($16,000 / $28,000) = 4.57 years

Therefore, the correct answer is C) 3.57 years.

An Investment Project Requires an Initial Investment of $100,000