QuestionJuly 21, 2025

A project that costs 24,500 today will generate cash flows of 8,400 per year for seven years. What is the project's payback period? 3.00 years 2.92 years .34 years 2.33 years 2.43 years

A project that costs 24,500 today will generate cash flows of 8,400 per year for seven years. What is the project's payback period? 3.00 years 2.92 years .34 years 2.33 years 2.43 years
A project that costs 24,500 today will generate cash flows of 8,400 per year
for seven years. What is the project's payback period?
3.00 years
2.92 years
.34 years
2.33 years
2.43 years

Solution
4.6(248 votes)

Answer

2.08 years Explanation 1. Calculate cumulative cash flow Add annual cash flows until they equal or exceed the initial investment of \24,500. - Year 1: \8,400 - Year 2: \16,800 - Year 3: \25,200 2. Determine payback period The payback occurs during Year 3. Calculate the fraction of the year needed to recover the remaining \700 (\24,500 - \24,800). Fraction = Remaining amount / Annual cash flow = \700 / \8,400 = 0.083 years. 3. Sum full years and fraction Payback Period = 2 full years + 0.083 years = 2.083 years.

Explanation

1. Calculate cumulative cash flow<br /> Add annual cash flows until they equal or exceed the initial investment of \$24,500.<br />- Year 1: \$8,400<br />- Year 2: \$16,800<br />- Year 3: \$25,200<br /><br />2. Determine payback period<br /> The payback occurs during Year 3. Calculate the fraction of the year needed to recover the remaining \$700 (\$24,500 - \$24,800).<br /> Fraction = Remaining amount / Annual cash flow = \$700 / \$8,400 = 0.083 years.<br /><br />3. Sum full years and fraction<br /> Payback Period = 2 full years + 0.083 years = 2.083 years.
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