Question

The Cavendish Company is considering a project with an initial investment of $8 million that has an accounting rate of return of 25%. The project will generate an annual net cash flow of $1.75 million and annual net operating income of $2 million. What is the project's payback period?

Answer 1

4 years and 2 months

Step-by-step explanation:

The project's payback period is the length of time that the future cash flows take to equal the initial investment of the project.

Initial Investment = $8 million

Annual cash flows = $1.75 million

It will take 4 years and 2 months ($1 million /$8 million x 12) for annual cashflows to equal the Initial Investment of $8 million.