Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Question

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 1.86 years 
B) 2.07 years 
C) 2.30 years 
D) 2.53 years 
E) 2.78 years

Quizplus · Accepted Answer

To calculate payback, we need to keep adding up the cash inflows until we reach the initial investment.

Year 1: 200,000
Year 2: 300,000
Year 3: 400,000
Year 4: 500,000
Year 5: 600,000

Cumulative cash inflows:
Year 1: 200,000
Year 2: 500,000 (200,000 + 300,000)
Year 3: 900,000 (500,000 + 400,000)
Year 4: 1,400,000 (900,000 + 500,000)
Year 5: 2,000,000 (1,400,000 + 600,000)

Therefore, the payback period is between Year 4 and Year 5, and we can calculate the exact payback period as follows:
Initial investment = 1,500,000
Amount remaining to recover = 500,000 (2,000,000 - 1,500,000)
Payback period = 4 + (500,000/600,000)
Payback period = 4.83 years

Since answer option C is the closest to our calculation, it is the best choice.