Final answer:
The payback period for a project with an initial investment of $75,000 and an annual net cash flow of $16,000 is 4.6875 years, which rounds up to 5 years.
Step-by-step explanation:
The payback period is the time it takes for an investment to generate an amount of income or cash flow to cover the initial capital cost of the investment. In this scenario, the student asks how to calculate the payback period for a project that requires a $75,000 investment with a return of $16,000 annually to perpetuity, starting in one year. Since the cash flow is in perpetuity, the payback period is simply the investment amount divided by the annual cash flow.
To calculate the payback period, divide the initial investment by the annual net cash flow:
Payback Period = $75,000 / $16,000 per year
= 4.6875 years
Rounded to the next whole year, the payback period would be 5 years.