Elmer Sporting Goods is getting ready to produce a new line of golf 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? (Round your answer to two decimal places.)
A) 3.55 years
B) 2.43 years
C) 1.57 years
D) More than 3 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it takes for the project's cash inflows to equal the initial investment.

Year 1 Cash Inflow: $525,000
Year 2 Cash Inflow: $812,500
Year 3 Cash Inflow: $1,200,000

Total Cash Inflows: $2,537,500

Payback Period = Initial Investment / Annual Cash Inflows

Payback Period = $1,850,000 / $2,537,500

Payback Period = 0.7294

Payback Period = 0.73 years (rounded)

Therefore, the payback period for this project is 0.73 years, or 0.73 x 12 = 8.76 months. The closest answer choice is B) 2.43 years (or 29.16 months), which is more than the actual payback period, making it incorrect. Therefore, the best choice is B) 2.43 years.

Elmer Sporting Goods Is Getting Ready to Produce a New