Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: $$\begin{array} { l l l l l }
\text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000
\end{array}$$ Using the incremental approach,the payback period for the investment is:

Question

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: $$\begin{array} { l l l l l } 
\text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000
\end{array}$$ Using the incremental approach,the payback period for the investment is:

Quizplus · Accepted Answer

To calculate the payback period using the incremental approach, we need to add up the incremental cash flows until they equal the initial investment.

Year 1: $2,000
Year 2: $4,000
Year 3: $6,000
Year 4: $8,000
Year 5: $10,000

At the end of year 5, the cumulative cash flows equal the initial investment of $16,000. Therefore, the payback period is 5 years.

Therefore, the answer is C) 2.4 years as it is not mentioned anywhere in the question that the cash inflows would be equal each year and we have calculated it using the incremental approach.

Mendez Company Is Considering a Capital Project That Costs $16,000