Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.
Annual Net Cash Flows
$$\begin{array} { l l }
\text { Year 1 } & \$ 40,000 \
\text { Year 2 } & \$ 40,000 \
\text {Year 3 } & \$ 35,000 \
\text {Year 4 } & \$ 35,000 \
\text {Year 5 } & \$ 30,000
\end{array}$$ Compute the payback period for this investment.
A) 3.00 years.
B) 2.50 years.
C) 3.62 years.
D) 2.57 years.
E) 2.85 years.

Question

Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.
Annual Net Cash Flows
  $$\begin{array} { l l } 
\text { Year 1 } & \$ 40,000 \
\text { Year 2 } & \$ 40,000 \
\text {Year 3 }  & \$ 35,000 \
 \text {Year 4 }  & \$ 35,000 \
 \text {Year 5 }  & \$ 30,000
\end{array}$$ Compute the payback period for this investment. 
A) 3.00 years.
B) 2.50 years.
C) 3.62 years.
D) 2.57 years.
E) 2.85 years.

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $100,000. The annual net cash flows are $40,000, $40,000, $35,000, $35,000, and $30,000. The payback period can be calculated by adding up the net cash flows until they reach $100,000. In this case, the payback period is 2.57 years.

Nestor Company Is Considering the Purchase of an Asset for $100,000