Ribelin Corporation is adding a new product line that will require an investment of $138,000.The product line is estimated to generate cash inflows of $25,000 the first year,$23,000 the second year,and $18,000 each year thereafter for ten more years.What is the payback period?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how many years it will take to recover the initial investment of $138,000. 
Year 1: $25,000
Year 2: $23,000
Year 3-12: $18,000 each year

Total cash inflow:
$25,000 + $23,000 + ($18,000 x 10) = $247,000

Cumulative cash inflow:
Year 1: $25,000
Year 2: $48,000
Year 3: $66,000
Year 4: $84,000
Year 5: $102,000
Year 6: $120,000
Year 7: $138,000 (Payback period)

Therefore, the payback period is 7 years which is the closest to the third option (C).

Ribelin Corporation Is Adding a New Product Line That Will