EKG, Inc.is considering a new project that will require an initial cash investment of $419,000.The project will produce no cash flows for the first two years.The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively.How long will it take the firm to recover its initial investment in this project?
A)3.81 years
B)3.98 years
C)5.57 years
D)5.99 years
E)The project never pays back.

Question

Quizplus · Accepted Answer

The cumulative cash flows over the years are: Year 3: $69,000, Year 4: $167,000, Year 5: $276,000, Year 6: $421,000. The initial investment is recovered between Year 5 and Year 6. Calculating the exact payback period: $419,000 - $276,000 = $143,000 needed in Year 6. $143,000/$145,000 = 0.99 years. Total payback period = 5 + 0.99 = 5.99 years.

EKG, IncIs Considering a New Project That Will Require an Initial