Garner Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c }
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 350 & \$ 200 & \$ 200 & \$ 200
\end{array}$$
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

Question

Garner Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 350 & \$ 200 & \$ 200 & \$ 200
\end{array}$$
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

Quizplus · Accepted Answer

The project's payback period is the time it takes for the cumulative cash flows to equal the initial investment. After 1 year, the cumulative cash flow is $200. After 2 years, it is $400, which exceeds the initial investment of $350. The payback period is 1 year plus the fraction of the second year needed to recover the remaining $150, which is $150/$200 = 0.75. Therefore, the payback period is 1.75 years.

Garner Inc Year 0123 Cash flows −$350$200$200$200\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 350 & \$ 200 & \$ 200 & \$ 200\end{array} Year Cash flows ​0−$350​1$200​2$200​3$200​​

Garner Inc $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 350 & \$ 200 & \$ 200 & \$ 200\end{array}$