(Ignore income taxes in this problem.) The management of Morrissette Corporation is considering a project that would require an investment of $284,000 and would last for 7 years. The annual net operating income from the project would be $135,000, which includes depreciation of $37,000. The scrap value of the project's assets at the end of the project would be $25,000. The payback period of the project is closest to:

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. The annual cash inflow is the net operating income plus depreciation (since depreciation is a non-cash charge). Thus, the annual cash inflow is $135,000 + $37,000 = $172,000. The payback period is $284,000 / $172,000 ≈ 1.65 years, which is closest to 1.7 years.

(Ignore Income Taxes in This Problem