Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value.The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 10%.The payback period for this project is closest to:
A)3 years
B)2 years
C)2.5 years
D)2.67 years

Question

Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value.The project would provide net operating income each year as follows for the life of the project:  The company's required rate of return is 10%.The payback period for this project is closest to:
A)3 years 
B)2 years 
C)2.5 years 
D)2.67 years

Quizplus · Accepted Answer

The payback period is the time it takes for the initial investment to be paid back from the net operating income generated by the project. To calculate the payback period, we need to add up the net operating income until it equals the initial investment.

Year 1: $40,000
Year 2: $70,000
Year 3: $90,000
Year 4: $100,000
Year 5: $110,000
Year 6: $120,000
Year 7: $130,000
Year 8: $140,000

To calculate the payback period, we start with the first year and add up the net operating income until it equals the initial investment of $300,000.

Year 1: $40,000, cumulative net operating income: $40,000, remaining investment: $260,000
Year 2: $70,000, cumulative net operating income: $110,000, remaining investment: $190,000

Therefore, the payback period is 2 years, which is the closest answer choice to our calculation.

Harrison Corporation Is Studying a Project That Would Have an Eight-Year