Question

The management of L Corporation is considering a project that would require an investment of $223,000 and would last for 6 years. The annual net operating income from the project would be $107,000, which includes depreciation of $16,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):.

Answer 1

Payback period = 1.813 years

Step-by-step explanation:

If a project has equal annual cash-flows, the payback period can be calculated using the formula:

`Payback=(CostOfMachine)/(AnnualCashflows)`

The annual cash-flow figure that is to be used in this calculation should not include depreciation as depreciation is a non-cash item. Net operating income from the project would be $107,000 and to get to annual cash-flows, depreciation should be added back.

Annual cash-flows would therefore be $107,000

`AnnualCashflows=107,000+16,000=123,000`

As such:

`Payback=(223,000)/(123,000)= 1.813years`