Question

The management of L Corporation is considering a project that would require an investment of $260,000 and would last for 6 years. The annual net operating income from the project would be $110,000, which includes depreciation of $17,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):

Answer 1

Answer:

2.04 years

Explanation:

Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows.

To derive cash flows from net income, add depreciation to net income.

$110,000 + $17,000 = $127,000

Payback period = $260,000 / $127,000 = 2.04 years

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