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.)
A) 2.85 years.
B) 2.57 years.
C) 3.00 years.
D) 2.50 years.
E) 3.62 years.

Question

Quizplus · Accepted Answer

Yearly cash flow = $20,000
Payback period = $100,000/$20,000 = 5 years
Since the cash flows occur evenly throughout the year, the payback period is half of the fifth year, which is 2.5 years. Therefore, the best choice is option B.

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