Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The company expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. Payback: What is the payback period for this project?

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash flow. $21 million / $7 million per year = 3.0 years.

Strange Manufacturing Company Is Purchasing a Production Facility at a Cost