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Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows a. 1.39 years b. 1.77 years O c. 1.23 years d. 2.39 years e. 1.69 years 0 -$425 1 $240 2 $240 3 $240

Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows a. 1.39 years b. 1.77 years O c. 1.23 years d. 2.39 years e. 1.69 years 0 -$425 1 $240 2 $240 3 $240

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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### 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**.
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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