Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Using the incremental approach, the payback period for the investment is:
$$\begin{array} { | l | l | l | l | l | }
\hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\hline \$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000 \
\hline
\end{array}$$

Question

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Using the incremental approach, the payback period for the investment is:
$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\hline \$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After Year 2, the cumulative cash flow is $14,000 ($8,000 + $6,000). In Year 3, an additional $2,000 is needed to reach $16,000, which takes 0.4 of the year ($2,000/$5,000). Therefore, the payback period is 2.4 years.

Mendez Company Is Considering a Capital Project That Costs $16,000