Question

Orange Corporation has gathered the following data on a proposed investment project: Investment in depreciable equipment $ 520,000 Annual net cash flows $ 78,000 Life of the equipment 10 years Salvage value $ 0 Discount rate 6 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment would be: Multiple Choice 1.0 years 0.2 years 4.7 years 6.7 years

Answer 1

Answer:

6.7 years

Explanation:

According to the scenario, computation of the given data are as follows,

Investment = $520,000

Net cash flow = $78,000

Life of equipment = 10 years

So, we can calculate the payback period for investment by using following formula,

Payback period for investment = Initial Investment ÷ Net cash flow

= $520,000 ÷ $78,000

= 6.67 years or 6.7 years