What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?
A) 4.33 years
B) 3.33 years
C) 2.33 years
D) 1.33 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine the number of years it will take to recover the initial investment. We do this by adding up the cumulative cash inflows until they equal the initial investment.

In this case, the cumulative cash inflows are:
Year 1: $1,800,000
Year 2: $3,700,000 ($1,800,000 + $1,900,000)
Year 3: $4,400,000 ($3,700,000 + $700,000)
Year 4: $6,200,000 ($4,400,000 + $1,800,000)

It takes 3 years and some months for the cumulative cash inflows to equal the initial investment of $5,000,000. Therefore the payback period is 3.33 years. The best choice is B.

What Is the Payback Period for Tangshan Mining Company's New