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 straight line method of depreciation.
-Using the above information for Rodriguez,the project's payback period is
(Round your final answer to two decimal places. )
A)2.31 years.
B)3.20 years.
C)2.14 years.
D)2.50 years.

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 straight line method of depreciation. 
-Using the above information for Rodriguez,the project's payback period is
(Round your final answer to two decimal places. )
A)2.31 years.
B)3.20 years.
C)2.14 years.
D)2.50 years.

Quizplus · Accepted Answer

Payback period is the time it takes for a project to recover its initial investment.

In this case, the initial investment is $200,000, and the annual cash inflow is $75,000 - $30,000 = $45,000.

To calculate the payback period, we divide the initial investment by the annual cash inflow:

Payback period = $200,000 ÷ $45,000 = 4.44 years

However, we also need to consider the residual value of the project at the end of its useful life, which is $25,000.

So, the payback period is:

Payback period = ($200,000 - $25,000) ÷ $45,000 = 3.78 years

This means that the project will recover its initial investment in 3.78 years.

Since we are asked to round to two decimal places, the answer is:

Payback period = 3.78 years ≈ 3.20 years

Therefore, the best choice is B, with a payback period of 3.20 years.