An investment of $42,000 is expected to generate the following annual cash flows: Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Question

An investment of $42,000 is expected to generate the following annual cash flows:  Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Quizplus · Accepted Answer

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

Year 1 cash flow = $10,000
Year 2 cash flow = $18,000
Year 3 cash flow = $14,000

Total cash inflows after year 2 = $10,000 + $18,000 = $28,000
Remaining investment after year 2 = $42,000 - $28,000 = $14,000
Payback period = Year 2 + Remaining investment / Year 3 cash flow = 2 + $14,000 / $14,000 = 3.17 years

Therefore, the best choice is B.

An Investment of $42,000 Is Expected to Generate the Following