Garner 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
−$350
$200
$200
$200
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

Question

Quizplus · Accepted Answer

The project's payback period is the time it takes for the cumulative cash flows to equal the initial investment. After Year 1, the cumulative cash flow is $200. After Year 2, it is $400. The initial investment is $350, so the payback period is between Year 1 and Year 2. The remaining $150 ($350 - $200) is recovered in 0.75 of Year 2 ($150/$200), so the payback period is 1.75 years.