Payback: Smart Sporting Goods is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how long it will take to recover the initial investment of $1.85 million.

Year 1 cash flow = $525,000
Remaining investment = $1.85 million - $525,000 = $1,325,000

Year 2 cash flow = $812,500
Remaining investment = $1,325,000 - $812,500 = $512,500

Year 3 cash flow = $1,200,000
Remaining investment = $512,500 - $1,200,000 = -$687,500 (negative means it has been recovered)

Therefore, it will take 2 years and 4 months (or 2.43 years) to recover the initial investment.

The best choice is B because it provides the correct payback period.

Payback: Smart Sporting Goods Is Getting Ready to Produce a New