Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the payback period for this project? (Round your answer to one decimal place.)
A) 1.7 years
B) 2.2 years
C) 1.2 years
D) 2.7 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. In the first year, the project generates $13,000,000, which is less than the initial investment of $30,000,000. By the end of the second year, the total cash flow is $13,000,000 + $23,000,000 = $36,000,000, which exceeds the initial investment. To find the exact payback period, calculate the fraction of the year needed in the second year to reach the initial investment: $30,000,000 - $13,000,000 = $17,000,000 needed in the second year. $17,000,000 / $23,000,000 = 0.739, approximately 0.7 of a year. Thus, the payback period is 1 year + 0.7 year = 1.7 years.