(Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment which has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment.
Assuming that the cash inflows occur evenly over the year, the payback period for the investment is:

Question

(Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment which has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment. 
Assuming that the cash inflows occur evenly over the year, the payback period for the investment is:

Quizplus · Accepted Answer

To calculate the payback period, we need to determine in which year the total cash inflows equal the initial investment of $200,000. 
Year 1: $40,000
Year 2: $55,000 
Year 3: $60,000 
Year 4: $75,000 
Year 5: $70,000 
Total cash inflows for the first 3 years = $40,000 + $55,000 + $60,000 = $155,000
Remaining initial investment = $200,000 - $155,000 = $45,000
Payback period = 3 + ($45,000 ÷ $75,000)
Payback period = 3.6 years
Therefore, the payback period for the investment is approximately 2.5 years (option D).

(Ignore Income Taxes in This Problem