McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$1,150
$500
$500
$500
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Question

Quizplus · Accepted Answer

To calculate payback, we need to determine the point in time when the initial investment is recovered.

Year 0: -$1,150
Year 1: $500  (Cumulative cash flow: -$650)
Year 2: $500 (Cumulative cash flow: -$150)
Year 3: $500 (Cumulative cash flow: $350)

The initial investment of $1,150 is recovered at the end of Year 2. Therefore, the payback period is 2 + (150/500) = 2.3 years. Choice C is the closest to this answer.