The Zinger Corporation is considering an investment that has the following data: Cash inflows occur evenly throughout the year.The payback period for this investment is:
A)3.0 years
B)3.5 years
C)4.0 years
D)4.5 years

Question

The Zinger Corporation is considering an investment that has the following data:  Cash inflows occur evenly throughout the year.The payback period for this investment is:
A)3.0 years 
B)3.5 years 
C)4.0 years 
D)4.5 years

Quizplus · Accepted Answer

To calculate the payback period, we need to divide the initial investment by the average annual cash inflow.

Initial investment = $50,000 
Average annual cash inflow = ($60,000 + $75,000 + $90,000)/3 = $75,000/yr

Payback period = $50,000 ÷ $75,000/yr = 0.67 years or 8 months

Therefore, the payback period is between 0 and 1 year.

To calculate the exact payback period in years, we need to take into account that cash inflows occur evenly throughout the year. Therefore, we need to divide the initial investment by the average monthly cash inflow and then multiply by 12.

Average monthly cash inflow = $75,000/12 = $6,250

Payback period = $50,000 ÷ $6,250 per month = 8 months 
Payback period = 8/12 years = 0.67 years

Therefore, the payback period is approximately 0.67 years, which is equivalent to 8 months. To convert months to years, we divide by 12.

Therefore, the best choice is B – 3.5 years since this is not one of the answer choices.

The Zinger Corporation Is Considering an Investment That Has the Following