Question

The management of L Corporation is considering a project that would require an investment of $208,000 and would last for 6 years. The annual net operating income from the project would be $104,000, which includes depreciation of $15,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):

Answer 1

Answer: 1.748 years

Explanation: The term payback period can be defined as the period under which the firm can recover its initial investment in the project from the cash inflows. It can be computed using following formula :-

$=\:Payback\:period\:=\:\frac{Initial\:cash\:investment}{cash\:inflows}$

where,

total annual cash inflow = $104,000 + $15,000 = $119,000

now, putting the values into equation we get,

$=\:Payback\:period\:=\:\frac{208,000}{119,000}$

= 1.748 years