Question

The management of Lanzilotta Corporation is considering a project that would require an investment of $280,000 and would last for 6 years. The annual net operating income from the project would be $114,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $25,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)
A. 1.9 years
B. 2.5 years
C. 1.6 years
D. 3.2 years

Answer 1

Answer:

The correct answer is D.

Explanation:

Giving the following information:

Initial investment= $280,000

Cash flow= 114,000 - 31,000= 83,000

The payback period is the time required to cover for the initial investment.

Year 1= 83,000 - 280,000= -197,000

Year 2= 83,000 - 197,000= -114,000

Year 3= 83,000 - 114,000= -31,000

Year 4= 83,000 - 31,000= 52,000

To be more accurate:

(31,000/83,000)*365= 136

3.37 years

It will take 3 years and 136 days to cover for the initial investment.