Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment is closest to:
A)0.2 years
B)2.5 years
C)4.8 years
D)5.0 years

Question

Chee Corporation has gathered the following data on a proposed investment project:  The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment is closest to:
A)0.2 years 
B)2.5 years 
C)4.8 years 
D)5.0 years

Quizplus · Accepted Answer

To calculate the payback period, we need to find the time it takes for the cumulative cash inflows to equal the initial investment. 
Cumulative cash inflows:
1st year - $200,000
2nd year - $300,000
3rd year - $400,000
4th year - $500,000
5th year - $600,000
Cumulative cash inflows at the end of year 3 = $900,000 which is the amount needed to recover the initial investment ($900,000). Therefore, the payback period is 3 years + (initial investment - cumulative cash inflows at the end of year 3)/cash inflow in the 4th year. 
Payback period = 3 + ($1,000,000 - $900,000)/$500,000 = 4.8 years.

Chee Corporation Has Gathered the Following Data on a Proposed