Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:### Project Payback Period Calculation
**Resnick Inc.** is evaluating a new project and has the following cash flow data. The objective is to determine the project's payback period.
#### Cash Flow Data:
| Year | Cash Flow |
|------|-----------|
| 0 | -$425 |
| 1 | $240 |
| 2 | $240 |
| 3 | $240 |
#### Payback Period Options:
- a. 1.39 years
- b. 1.77 years
- c. 1.23 years
- d. 2.39 years
- e. 1.69 years
### Calculation of Payback Period
1. **Initial Investment (Year 0)**: The project starts with an initial cash outflow of $425.
2. **Cash Inflows**:
- Year 1: $240
- Year 2: $240
- Year 3: $240
To determine the payback period, we calculate how long it takes for the cumulative cash inflows to equal the initial investment:
- After Year 1: Total cash inflow = $240
- After Year 2: Total cash inflow = $240 (Year 1) + $240 (Year 2) = $480
By the end of Year 1, $240 of the initial $425 investment is recovered. This leaves $425 - $240 = $185 to be recovered. By Year 2, the $185 remaining from the initial investment is fully recovered, with some surplus.
Since $240 is received in Year 2, the fraction of the year required to recover the remaining $185 is: \( \frac{185}{240} \approx 0.77 \) years.
Thus, the payback period is: 1 year + 0.77 years = **1.77 years**.
### Conclusion
The project's payback period, according to the cash flow data, is **1.77 years**. Therefore, the correct option is **b. 1.77 years**.
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