DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the payback period of this project? Select one: a. 2.50 years b. 3.09 years c. 2.91 years d. 4.00 years

Question

Demarcus Reese

Business

13 December, 09:51

DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the payback period of this project? Select one: a. 2.50 years b. 3.09 years c. 2.91 years d. 4.00 years

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Billy Black · Answer 1

a. 2.50 years

Explanation:

The payback period do not take into account of time value of cashflow, thus we ignore the rate of return in this calculation.

The investment for new system in $750,000, then it need cash flow in year 1 of $350,000; year 2 of $325,000 and $75,000 in year to get full back $750,000.

$75,000 is 50% of total cash flow $150,000 in year 3, then it takes 0.5 year 3.

So the payback period of this project is year 1 + year 2 + 0.5 year 3 = 2.5 years.