Norton Corporation is considering a 6 year project having an initial investment of $150,000.The project will provide cash inflows of $25,000 for the first 3 years and $60,000 during the last 3 years.Given this information, calculate the project's payback.
A)3.75 years
B)4.00 years
C)4.25 years
D)4.50 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to determine how long it will take for the cumulative cash inflows to equal the initial investment of $150,000.

Year 1: $25,000 in cash inflows, cumulative cash inflow = $25,000, remaining investment = $125,000.
Year 2: $25,000 in cash inflows, cumulative cash inflow = $50,000, remaining investment = $100,000.
Year 3: $25,000 in cash inflows, cumulative cash inflow = $75,000, remaining investment = $75,000.
Year 4: $60,000 in cash inflows, cumulative cash inflow = $135,000, remaining investment = $15,000.
Year 5: $60,000 in cash inflows, cumulative cash inflow = $195,000, remaining investment = $0.

Therefore, the project's payback period is 4.25 years (75,000 ÷ 60,000 = 1.25; 3 + 1.25 = 4.25). The best choice is C.

Norton Corporation Is Considering a 6 Year Project Having an Initial