Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback?
A)1.86 years
B)2.07 years
C)2.30 years
D)2.53 years
E)2.78 years

Question

Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? 
A)1.86 years 
B)2.07 years 
C)2.30 years 
D)2.53 years 
E)2.78 years

Quizplus · Accepted Answer

To calculate the payback period, we need to keep adding up the cash inflows until we reach the initial investment.

Year 1 = $300,000
Year 2 = $250,000
Year 3 = $200,000
Year 4 = $150,000
Year 5 = $100,000

Adding up the cash inflows, we get: 
Year 1 = $300,000
Year 2 = $550,000
Year 3 = $750,000
Year 4 = $900,000
Year 5 = $1,000,000

The initial investment was $700,000. We can see that the sum of cash inflows equals the initial investment in Year 3. Therefore, the payback period is 2 years and 10 months, or 2.30 years.

So, the best choice is C) 2.30 years.