RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Question

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows:  Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Quizplus · Accepted Answer

To calculate the payback period, we need to calculate the cash inflows each year until the investment is paid back.

Year 1: $15,000 
Year 2: $25,000 
Year 3: $30,000

Total cash inflows for year 1 and 2: $15,000 + $25,000 = $40,000

To find the payback period, we divide the initial investment by the total cash inflows for year 1 and 2:

$60,000 ÷ $40,000 = 1.5 years

Since we have paid back half of the investment at the end of year 2, we need to find out how long it will take to pay back the remaining $20,000.

Year 3: $30,000 – $20,000 = $10,000

We divide the remaining investment by the cash inflow for year 3:

$20,000 ÷ $10,000 = 2 years

Adding the two years together:

1.5 years + 2 years = 3.5 years

However, since the question asks for an approximation to two decimal points, we round down to 2.53 years.

Therefore, the best choice is B.

RentitAll Management Services Is Considering an Investment of $60,000