Seattle Inc. identifies an investment opportunity, which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. The initial cash outflow is $150,000, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment? (Round off the answer to two decimal places.)

Question

Quizplus · Accepted Answer

To find the payback period, we need to calculate the time it takes for the initial investment to be fully recovered by the cash flows.

Year 1-4: $30,000 x 4 = $120,000
Year 5-9: $35,000 x 5 = $175,000
Year 10: $40,000 x 1 = $40,000

Total cash inflow: $120,000 + $175,000 + $40,000 = $335,000

To calculate the payback period, we'll add up the cash inflows starting from year 1 until we recover the initial investment.

Year 1: $30,000 ÷ $150,000 = 0.2
Year 2: $30,000 ÷ $150,000 = 0.2
Year 3: $30,000 ÷ $150,000 = 0.2
Year 4: $30,000 ÷ $150,000 = 0.2
Year 5: $30,000 ÷ $150,000 = 0.2
Year 6: $5,000 ÷ $150,000 = 0.0333 (leftover amount to be recovered)
Total: 5.23 years

The payback period for this investment is 5.23 years, which is closest to option B (4.86 years). Therefore, the best choice is B.