GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlo's expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the truck's 5-year life. What is the payback period for this project?
A) 3 years
B) 4.2 years
C) 3.5 years
D) 3.3 years

Question

Quizplus · Accepted Answer

To calculate payback period, divide the cost of the investment by the annual cash flows generated by the investment.

Payback period = Cost of investment / Annual cash flows

In this case, the cost of the investment is $21,000 and the annual cash flows are $6,000. So,

Payback period = $21,000 / $6,000
Payback period = 3.5 years

Therefore, the answer is choice letter C, 3.5 years.

GoFlo Is a Small Growing Firm That Is Considering the Purchase