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

The payback period is the time it takes to recover the initial investment. To calculate this, we need to find the cumulative cash flow each year until it equals the initial investment of $300,000.

Year 1: $100,000
Year 2: $100,000
Year 3: $100,000
Year 4: ($40,000 + $80,000) = $120,000

Total cumulative cash flow at the end of Year 4 is $420,000, which exceeds the initial investment of $300,000. Therefore, the payback period is between Year 3 and Year 4, which is (300,000 - 200,000)/120,000 = 0.83 years into Year 4. Thus, the payback period is approximately 4.83 years or 4.8 years (rounded to the nearest tenth). Therefore, the best choice is C) 4.8 years.

Chee Corporation Has Gathered the Following Data on a Proposed