Question

Runnin' Wild Family Fun Center bought new go-karts for its recreation facility. The useful life is 6 years. The go-karts had a total cost of $5,100 and will generate $1,700 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $650. The payback period in years is closest to
A) 3.38.B) 3.00.C) 2.62.D) 2.17.

Answer 1

Answer:

The payback period in years is closest to;

B). 3.00

Explanation:

Step 1: Determine the total cost of the go-kart

Using the expression;

Total cost=purchase cost+annual depreciation×number of years

where;

purchase cost=$5,100

assume annual depreciation=0

number of years to payback=n

replacing;

Total cost=5,100+(0×n)=5,100

Step 2: Total cash inflows

Total cash inflows=(1,700×n)=1,700 n

Step 3: Determine payback period

Equate total cost to total cash inflows

5,100=1,700 n

n=5,100/1,700

n=3

The payback period in years is closest to 3 years