Maple 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

Maple 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 expected annual cash inflows until the investment is fully paid back. From the table, we can see that the cumulative cash flow becomes positive in the second year and reaches $60,000 in the third year. Therefore, the payback period is between 2 and 3 years, and we can use the formula: 
Payback period = Year before full recovery + (Unrecovered cost at start of year / Cash flow during year)

In this case, the year before full recovery is 2, and the unrecovered cost at the start of year 3 is $5,000. The cash flow during year 3 is $30,000.

Payback period = 2 + (5,000 / 30,000) = 2.17 (rounded to two decimal points)

Therefore, the best choice is C as it is the closest approximation to the calculated payback period.

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