Question

The management of Lanzilotta Corporation is considering a project that would require an investment of $275,000 and would last for 6 years. The annual net operating income from the project would be $113,000, which includes depreciation of $18,000. The scrap value of the project's assets at the end of the project would be $17,500. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.): __________

Answer 1

With a discounted rate of 10%, the payback period of the project is closest to three years.

Step-by-step explanation:

To calculate this a Net Present Value (NPV) formula is needed. With a discounted rate of 10%, the NPV is calculated for different project's length (from year 6 to year 1, with the initial investment in year zero). The closest to value zero in NPV will correspond to the year where project payback is achieved. In this case, year 3 is the closest NPV to zero