Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? (Round your answer to two decimal places.)
A) 2.12 years
B) 1.88 years
C) 4.00 years
D) 3.00 years.

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash flows year by year until the total investment of $1,450,000 is recovered. Year 1: $640,000; Year 2: $640,000 + $715,250 = $1,355,250. The investment is not yet fully recovered by the end of Year 2. In Year 3, the cash flow is $823,330, but only $94,750 ($1,450,000 - $1,355,250) is needed to recover the full investment. The fraction of the year needed to recover the investment in Year 3 is $94,750 / $823,330. Adding this fraction (approximately 0.12 when rounded to two decimal places) to the 2 years gives a payback period of approximately 2.12 years.