Beecher Corporation is contemplating an investment project costing $200,000. The project is estimatedto have a four-year life, generate annual operating income of $35,000, and have a salvage value of$20,000 after four years. What is the project's payback period?

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual operating income. Here, the initial investment is $200,000, and the annual operating income is $35,000. Thus, the payback period is $200,000 / $35,000 = 5.71 years. However, this calculation does not consider the salvage value, which should be added to the total return. The correct approach for calculating the payback period when including the salvage value is to determine how long it takes for the cash flows to cover the initial investment. Since the salvage value is considered at the end of the project's life, it effectively reduces the net investment required. However, the provided options and the calculation method initially described do not accurately account for the salvage value in determining the payback period, leading to a straightforward division that suggests an incorrect method for incorporating salvage value. The correct payback period calculation should consider annual cash inflows and the timing of these inflows, including any final salvage value, to accurately determine when the initial investment is recovered.

Beecher Corporation Is Contemplating an Investment Project Costing $200,000