Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation.
-Using the above information for Rodriguez,the project's payback period (rounded to two decimal places)is

Question

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation. 
-Using the above information for Rodriguez,the project's payback period (rounded to two decimal places)is

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. The annual net cash inflow is $75,000 (revenues) - $30,000 (expenses) = $45,000. The payback period is $200,000 / $45,000 = 4.44 years. However, considering the residual value, the correct calculation is $175,000 / $45,000 = 3.89 years, which rounds to 3.20 years.