The Gorgeous Grand Hotel is considering overhauling and redesigning its main restaurant. Based on the following information, calculate the payback period.
Initial investment = $127,500
Investment life = 7 years
Increased revenues resulting from investment = $22,000 per year
Decreased costs resulting from investment = $8,000 per year
Salvage value associated with investment = $12,000 in year 7
Investment's required rate of return = 8%

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 sum of increased revenues and decreased costs, which is $22,000 + $8,000 = $30,000. The payback period is $127,500 / $30,000 = 4.25 years.

The Gorgeous Grand Hotel Is Considering Overhauling and Redesigning Its