Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to keep adding the cash inflows until the initial investment is recovered.

Year 0: -$600,000
Year 1: $200,000
Year 2: $250,000
Year 3: $300,000
Year 4: $350,000

At the end of year 2, the cumulative cash inflow is $450,000, which means the initial investment of $600,000 has not been fully recovered.

At the end of year 3, the cumulative cash inflow is $750,000, which means the initial investment has been recovered. The remaining amount is $150,000, which is the cash inflow in year 4.

Therefore, the payback period is 3 + ($150,000/$350,000) = 3.43 years, which can be rounded to 1.75 years.