Use the following information to answer the next question(s).
Sunny Flowers is considering the purchase of a small business that costs $500,000. Sunny plans to sell stock valued at $250,000. The stock would pay dividends of $20,000 per year. Sunny would borrow the remaining $250,000 from a local bank at 12 percent interest.
The business is expected to generate annual cash inflows of $80,000. Duane plans to operate the business for 15 years and then turn it over to his son.
-Payback for the project is
A) 6.11 years.
B) 6.25 years.
C) 7.96 years.
D) 8.33 years.

Question

Quizplus · Accepted Answer

To calculate payback, we need to determine how many years it will take for Sunny to recover her initial investment of $500,000.

The total cash inflows for the project are $80,000 per year, so it will take:

Payback = Initial Investment / Annual Cash Inflows
Payback = $500,000 / $80,000 per year
Payback = 6.25 years

Therefore, the answer is B.

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