Use the following information to answer the question(s)below.
Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal.The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today.The mine is expected to generate $16 million worth of ore per year for the next 12 years.At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.
-The payback period for Rearden's mining operation is closest to:
A)5.00 years.
B)6.00 years.
C)6.25 years.
D)6.50 years.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it will take for the cash inflows to offset the initial investment costs.

The initial investment cost is $100 million.

The annual cash inflow is $16 million.

The total cash inflows for the project would be $16 million per year for 12 years, which is equal to $192 million ($16 million x 12 years).

To calculate the payback period, we divide the initial investment by the annual cash inflow:

$100 million / $16 million per year = 6.25 years.

Therefore, the payback period for Rearden's mining operation is closest to 6.25 years.

Use the Following Information to Answer the Question(s)below