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Answer:
Payback =1.53 years
Explanation:
The annual cash-flow figure that is to be used in this calculation should not include depreciation as depreciation is a non-cash item. Net operating income from the project is $115,000 and to get to annual cash-flows, depreciation should be added back.
Annual cash-flows for each of the 6 years would therefore be:
The scrap value would be expected at the end of the project i.e end of year 6.
Year Cash-flow Balance
0 (225,000) (225,000)
1 147,000 (78,000)
2 147,000 69,000
By end of year 2, the company has already recovered the $225,000 initial investment as seen through the positive cumulative balance
Payback = Years With Negative Cumulative Cash-flow Balance +