The Brisbane Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $100,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find the point in time at which the accumulated cash inflows equal the initial investment of $100,000.
We can start by calculating the cumulative cash inflows for each year as follows:

Year 1: $30,000
Year 2: $60,000
Year 3: $90,000
Year 4: $120,000
Year 5: $155,000
Year 6: $190,000
Year 7: $225,000
Year 8: $260,000
Year 9: $295,000
Year 10: $335,000

The payback period is the point in time at which the cumulative cash inflows equal the initial investment of $100,000. From the calculation above, we can see that this occurs during Year 4. The remaining cash flows in Years 5 through 10 are irrelevant for the payback period calculation.
Therefore, the payback period for this investment is 4 years and 3 months, or 4.26 years.
The correct answer is B.

The Brisbane Corporation Has Been Presented with an Investment Opportunity