Question

Oriental Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment in depreciable equipment $ 200,000 Annual net cash flows $ 50,000 Life of the equipment 10 years Salvage value $ 0 Discount rate 10% 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 0.25 years 2.41 years 4 years 10 years

Answer 1

The payback period for the investment made by Oriental Corporation would be C. 4 years.

What is the payback period?

The payback period is a capital budgeting tool that considers the length of time it takes to recover the investment cost using periodic cash inflows.

The technique shows the length of time an investment reaches a breakeven point (equal costs with equal cash inflows).

Data and Calculations:

Investment cash = $200,000

Annual net cash flows = $50,000

Life span = 10 years

Salvage value = $0

Discount rate = 10%

Payback period = 4 years ($200,000/$50,000)

Thus, the payback period for the investment made by Oriental Corporation would be C. 4 years.

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