(Ignore income taxes in this problem.) Overland Corporation has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

-The payback period for the investment is:

Question

(Ignore income taxes in this problem.) Overland Corporation has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

-The payback period for the investment is:

Quizplus · Accepted Answer

Payback period is defined as the time required to recover the initial investment from the cash flows generated by the investment. In this case, the initial investment is $45,000 and the annual cash flow is $12,000. Dividing the initial investment by the annual cash flow gives us the payback period:
Payback period = $45,000 ÷ $12,000 = 3.75 years
Option B has the closest payback period to the calculated one, hence it is the best choice.

(Ignore Income Taxes in This Problem