The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $100,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year.

Question

Quizplus · Accepted Answer

The payback period is calculated by determining how long it takes for the cumulative cash flows to equal the initial investment. At a 10% cost of capital, the discounted cash flows need to be calculated for each year and summed until they equal or exceed $100,000. The correct payback period is approximately 4.26 years.

The Seattle Corporation Has Been Presented with an Investment Opportunity