Question

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year. What is the payback period for this investment?
Select one:
A. 5.23 years
B. 4.86 years
C. 4.00 years
D. 6.12 years
E. 4.35 years

Answer 1

Answer:

The payback period is 4.86 years.

Explanation:

The cost of capital or interest rate is 10%.

The initial investment is $150,000.

The inflows for 4 years is

= $30,000\ \times\ 4$

= $120,000

The inflows for the 5th year

= $35,000

The amount of $120,000 will be paid off in 4 years

Payback period

= 4 years + $\frac{\ 150,000\ - \ \ 120,000}{\ 35,000}$

= 4 years + $\frac{\ 30,000}{\ 35,000}$

= 4 years + 0.8571 years

= 4.86 years