Eagle Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the payback period for this investment. (Round to two decimal places.)

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine in which year the cumulative cash inflows will recover the initial investment.

Year 1: $30,000
Year 2: $30,000
Year 3: $30,000
Year 4: $30,000
Year 5: $30,000

In year 2, the cumulative cash inflow will be $60,000 ($30,000 + $30,000), which recovers the initial investment of $100,000. Therefore, the payback period is 2 years + (remaining investment to recover / cash flow in year 2) = 0.33 years.

Thus, the payback period is 2.33 years or 2.57 years rounded to two decimal places. The best choice is B.

Eagle Company Is Considering the Purchase of an Asset for $100,000