Payback: Creighton, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the firm's payback criteria?

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash flows until the initial investment is recovered. In this case, the cumulative cash flows reach $2,165,800 in 3.87 years, which is within the firm's 4-year criteria.