Final answer:
The payback period is a financial metric used to determine how long it will take for an investment to recoup its initial cost. In this case, the payback period for Resnick Inc.'s project is 2.5 years.
Step-by-step explanation:
The payback period is a financial metric used to determine how long it will take for an investment to recoup its initial cost. To calculate the payback period, you need to add up the cash flows until they equal or exceed the initial investment.
In this case, the initial investment is -$500, and the cash flows for years 1, 2, and 3 are $150, $200, and $300 respectively. We can calculate the payback period by subtracting the cumulative cash flows from the initial investment:
- Year 1: -$500 + $150 = -$350
- Year 2: -$500 + $150 + $200 = -$150
- Year 3: -$500 + $150 + $200 + $300 = $150
The payback period is the point at which the cumulative cash flows equal or exceed the initial investment. In this case, the payback period is between years 2 and 3. To find the exact payback period, we can use linear interpolation:
Payback Period = Year 2 + (Initial Investment - Cumulative Cash Flow in Year 2) / Cash Flow in Year 3
= 2 + (-$150 / $300)
= 2.5 years