RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Question

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows:  Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment ($60,000) by the annual net cash flows until the investment is fully paid back. Based on the information given, we can calculate the annual net cash flows as follows:
Year 1: $20,000
Year 2: $30,000
Year 3: $40,000
Year 4: $50,000
Year 5: $60,000

To calculate the payback period, we need to find the year in which the cumulative net cash flows first exceed the initial investment. In this case, it takes 2 years and 10 months (or 2.83 years) to collect $60,000 in net cash flow ($20,000 + $30,000 + $10,000 = $60,000). Therefore, the payback period is approximately 2.53 years (rounded to two decimal points).

Since the payback period is less than the company's cost of capital (18%), this investment would be a good choice.

RentitAll Management Services Is Considering an Investment of $60,000