Pro-Am Audio is a company that is contracted to DJ private events. Due to a recent increase in bookings, Pro-Am is considering the purchase of another mobile DJ unit. Pro-Am uses the payback method to evaluate its investments. The mobile DJ unit will cost $18,000, has a useful life of 14 years, and will generate $6000 in net cash inflows per year. The residual value of the unit is $800. What is the payback period for the mobile DJ unit?

Question

Quizplus · Accepted Answer

Payback period is the time required to recover the initial investment. 
Payback period can be calculated by dividing the initial investment by expected net cash inflows.

For the mobile DJ unit:
Initial investment = $18,000
Annual net cash inflows = $6,000
Residual value = $800

Net cash inflows for the payback period = $18,000 - $800 = $17,200

Payback period = $18,000 / $6,000 = 3 years

Since there is no fraction of a year, the payback period is exactly 3 years. Therefore, the best choice is C)3)00 years.

Pro-Am Audio Is a Company That Is Contracted to DJ