Asked by Baily Shelor on Jun 23, 2024
Verified
A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the payback of the project.
A) 7 years
B) 6 years
C) 5 years
D) 4 years
E) 3 years
Payback
The period of time required to recoup the funds expended in an investment, or how long it takes for an investment to reach a breakeven point.
Annual Cash Flows
The total cash that is generated and used by a business in one fiscal year.
Required Rate
This is often referred to as the minimum acceptable return on an investment, set by investors or managers.
- Acquire knowledge on the payback period and its role in analyzing investment ventures.
Verified Answer
MS
Mochiko SueyoshiJun 28, 2024
Final Answer :
C
Explanation :
The payback period is the time it takes for the project to recoup its initial investment from its cash flows. Here, the project generates $100,000 annually for the first 25 years. Thus, it takes 5 years ($500,000 / $100,000) to recover the initial investment of $500,000.
Learning Objectives
- Acquire knowledge on the payback period and its role in analyzing investment ventures.