(Ignore income taxes in this problem.) Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 10%. The payback period for this project is closest to:

Question

(Ignore income taxes in this problem.) Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:  The company's required rate of return is 10%. The payback period for this project is closest to:

Quizplus · Accepted Answer

To calculate the payback period, we need to calculate the cumulative net operating income each year until the initial investment of $300,000 is recovered.

Year 1: $75,000
Year 2: $90,000 ($75,000 + $90,000 = $165,000)
Year 3: $105,000 ($165,000 + $105,000 = $270,000)
Year 4: $120,000 ($270,000 + $120,000 = $390,000)

Therefore, the payback period is 2 years, because by the end of the second year the initial investment of $300,000 is recovered ($165,000 + $105,000 = $270,000 + $30,000 = $300,000).

(Ignore Income Taxes in This Problem