Question

The management of L Corporation is considering a project that would require an investment of $225,000 and would last for 6 years. The annual net operating income from the project would be $115,000, which includes depreciation of $32,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):_____.

a. 1.5 years.
b. 1.6 years.
c. 1.4 years.
d. 2.0 years.

Answer 1

a. 1.5 years

Step-by-step explanation:

Annual net cash flow = Annual net operating income + Depreciation

Annual net cash flow = $115,000 + $32,000

Annual net cash flow = $147,000

Initial investment = $225,000

Payback period = Initial investment / Annual net cash flow

Payback period = $225,000 / $147,000

Payback period = 1.530612245

Payback period = 1.5 years