Question

Earl is considering an investment that costs $200,000 with no residual value, an expected increase in net income of $70,000 and a 6 year useful life. The payback period for the investment would be:

A. 1.93 years.
B. 2 years.
C. 2.5years.
D. 1.5 years.

Answer 1

The payback period for the investment is approximately 2.86 years, so the closest option is D. 2.5 years.

Step-by-step explanation:

The payback period for an investment is the time it takes for the savings from the investment to equal the initial cost of the investment. To calculate the payback period, divide the initial investment by the annual net income. In this case, the investment cost is $200,000 and the expected increase in net income is $70,000 per year. So the payback period would be:

Payback Period = Initial Investment / Annual Net Income

Payback Period = $200,000 / $70,000

Payback Period ≈ 2.86 years.

Since the payback period is between 2 and 3 years, the closest option would be 2.5 years (option C).