Question

McGlothin Inc. is considering a project that has the following cash flow data. What is the project's payback?Year 0 1 2 3Cash flows −$1,150 $500 $500 $500a. 1.86 yearsb. 2.07 yearsc. 2.30 yearsd. 2.53 yearse. 2.78 years

Answer 1

Answer:

c. 2.30 years

Explanation:

In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

In year 0 = $1,150 (Initial investment)

In year 1 = $500

In year 2 = $500

In year 3 = $500

If we sum the first 2 year cash inflows than it would be $1,000

Now we deduct the $1,000 from the $1,150 , so the amount would be $150 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

And, the next year cash inflow is $500

So, the payback period equal to

= 2 years + ($150 ÷ $500)

= 2.30 years

In 2.30 yeas, the invested amount is recovered.