Final answer:
The payback period for the investment of $75,000 with an annual net cash flow of $16,000 is 5 years, when rounded up to the next whole year.
Step-by-step explanation:
The payback period is a straightforward financial metric used to assess the time required to recover the initial investment from the net cash flows generated by a project. In this specific scenario, the student inquires about the payback period for a project with an initial investment of $75,000 and an annual net cash flow of $16,000.
To calculate the payback period, one divides the initial investment by the annual net cash flow. In this case, $75,000 รท $16,000 equals 4.6875. When rounded up to the next whole year, the payback period becomes 5 years.
The result, 5 years, signifies the duration it takes for the project to recoup its initial investment solely from the net cash flows. This metric is particularly useful for evaluating the speed at which an investment can pay back its upfront costs, providing a measure of its liquidity and risk. It's important to note that the simplicity of the payback period comes with limitations, as it does not consider the time value of money or cash flows beyond the payback period.
In contrast to the student-proposed options of 4 or 6 years, the accurate payback period of 5 years is a valuable piece of information for decision-makers evaluating the feasibility and profitability of the investment. The payback period is just one tool in the financial analysis toolkit, and its interpretation should consider the broader financial context and goals of the investment.