Asked by Latroy Mayfield on Jun 01, 2024
Verified
Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? Initial investment = $500,000; life = five years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.
A) 2.5 years
B) 3.6 years
C) 3.9 years
D) 4.4 years
E) The payback period is greater than the project's life.
Payback Period
The amount of time it takes for an investment to generate an amount of income or cash flow to recover the cost of the investment.
Salvage Value
The projected sum an asset is expected to fetch at the end of its service life.
Cost Savings
The reduction in costs achieved through efficiency improvements, strategic purchase, or avoiding unnecessary expenses.
- Compute the net present value (NPV) and determine the internal rate of return (IRR) for a specified project.
Verified Answer
ZK
Zybrea KnightJun 06, 2024
Final Answer :
B
Explanation :
The payback period is calculated by adding the initial investment and dividing it by the annual cash inflow. Here, the annual cash inflow is $160,000 (cost savings). The initial investment is $500,000. So, the payback period = $500,000 / $160,000 = 3.125 years. Since payback period doesn't account for the time value of money, salvage value, or tax effects directly in its basic calculation, the closest answer is 3.6 years (B).
Learning Objectives
- Compute the net present value (NPV) and determine the internal rate of return (IRR) for a specified project.
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