Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

-MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000.The project will generate after-tax cash flows of $33,100 in year 1, $31,500 in year 2, and $31,200 in year 3.Assume that the firm's proper rate of discount is 10% and that the firm's tax rate is 40%.What is the project's payback period?
A)0.33 years
B)1.22 years
C)2.33 years
D)Three years

Question

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
 
-MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000.The project will generate after-tax cash flows of $33,100 in year 1, $31,500 in year 2, and $31,200 in year 3.Assume that the firm's proper rate of discount is 10% and that the firm's tax rate is 40%.What is the project's payback period?
A)0.33 years 
B)1.22 years 
C)2.33 years 
D)Three years

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recover its initial costs. Here, the cumulative cash flows are $33,100 in year 1, $64,600 ($33,100 + $31,500) by the end of year 2, and $95,800 ($64,600 + $31,200) by the end of year 3. Since the initial cost is $75,000, the project's payback period is between year 2 and year 3. Specifically, it recovers its initial cost in year 2 and continues to generate cash flow into year 3, making the payback period 2.33 years.

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