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

Question

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

Quizplus · Accepted Answer

The payback period is calculated by adding cash flows until the initial investment is recovered. After 2 years, $14,000 is recovered ($8,000 + $6,000). In Year 3, $2,000 more is needed, which takes 0.4 years ($2,000/$5,000). Thus, the payback period is 2.4 years.

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