Question

The management of L Corporation is considering a project that would require an investment of $223,000 and would last for 6 years. The annual net operating income from the project would be $107,000, which includes depreciation of $16,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):.

Answer 1

Answer:

Payback period = 1.813 years

Explanation:

If a project has equal annual cash-flows, the payback period can be  calculated using the formula:

$Payback=\frac{CostOfMachine}{AnnualCashflows}$

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 would be $107,000 and to get to annual cash-flows, depreciation should be added back.

Annual cash-flows would therefore be $107,000

$AnnualCashflows=107,000+16,000=123,000$

As such:

$Payback=\frac{223,000}{123,000}= 1.813years$