The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment. Assuming that the cash inflows occur evenly over each year,the payback period for the investment is:

Question

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment.  Assuming that the cash inflows occur evenly over each year,the payback period for the investment is:

Quizplus · Accepted Answer

To calculate the payback period, we need to find the time it takes for the total cash inflows to equal the initial investment.

Year 1 cash inflow: $40,000
Year 2 cash inflow: $60,000
Year 3 cash inflow: $70,000
Year 4 cash inflow: $80,000
Year 5 cash inflow: $100,000

Cumulative cash inflows after Year 1: $40,000
Cumulative cash inflows after Year 2: $100,000
Cumulative cash inflows after Year 3: $170,000
Cumulative cash inflows after Year 4: $250,000
Cumulative cash inflows after Year 5: $350,000

The payback period is reached in Year 3, when the cumulative cash inflows equal the initial investment of $200,000. Thus, the payback period is 2.5 years. Therefore, the correct answer is option C.

The Keego Company Is Planning a $200,000 Equipment Investment That