Payback: 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?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual cash flows until the investment is fully recovered.

Year 1: $525,000 / $1,850,000 = 0.2838
Year 2: $812,500 / $1,850,000 = 0.4392
Year 3: $1,200,000 / $1,850,000 = 0.6486

Summing the fractions, we get:

Payback period = Year 2 + (1 - remaining investment / cash flow in Year 3)
                = 2 + (1 - ($450,000 / $1,200,000))
                = 2.43 years

Therefore, the best choice is B.

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