EEG, Inc. is considering a new project that will require an initial cash investment of $388,000. The project will produce no cash flows for the first two years. The projected cash flows for years 3 through 7 are $69,000, $88,000, $102,000, $140,000, and $160,000, respectively. How long will it take the firm to recover its initial investment in this project?
A) 3.81 years
B) 3.98 years
C) 5.57years
D) 5.92 years
E) The project never pays back.

Question

Quizplus · Accepted Answer

The cumulative cash flows become positive in year 6. By the end of year 5, the cumulative cash flow is $399,000, which exceeds the initial investment of $388,000. Therefore, the payback period is between 5 and 6 years, specifically 5.92 years.

EEG, Inc Is Considering a New Project That Will Require an an Initial