Arrendo,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | }
\hline & \text { Investment A } & \text { Investment B } \
\hline \text { Initial capital investment } & \$ 107,000 & \$ 159,000 \
\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & 0 & \$ 26,000 \
\hline \text { Estimated annual net cash inflow for 10 years } & \$ 28,000 & \$ 46,000 \
\hline \text { Required rate of return } & 10 \% & 14 \% \
\hline
\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)
A) 3.46 years
B) 1.94 years
C) 2.89 years
D) 3.82 years

Question

Arrendo,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } 
\hline & \text { Investment A } & \text { Investment B } \
\hline \text { Initial capital investment } & \$ 107,000 & \$ 159,000 \
\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & 0 & \$ 26,000 \
\hline \text { Estimated annual net cash inflow for 10 years } & \$ 28,000 & \$ 46,000 \
\hline \text { Required rate of return } & 10 \% & 14 \% \
\hline
\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)
A) 3.46 years
B) 1.94 years
C) 2.89 years
D) 3.82 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. To calculate the payback period, we divide the initial investment by the annual net cash inflow. For Investment B, the payback period is $159,000 / $46,000 = 3.46 years.

Arrendo,Inc Calculate the Payback Period for Investment B