Seattle, Inc., is contemplating a project that costs $180,000. Expectations are

Question

Seattle, Inc., is contemplating a project that costs $180,000. Expectations are that annual cash revenues will be $70,000 and annual expenses (including depreciation) will total $30,000. The project has a six-year useful life and a residual value of $30,000. Assume Seattle Inc. uses straight line method of depreciation.

The project's payback period is a. 2.31 years. b. 2.77 years. c. 2.57 years. d. 2.14 years. Seattle, Inc., is contemplating a project that costs $180,000. Expectations are that annual cash revenues will be $70,000 and annual expenses (including depreciation) will total $30,000. The project has a six-year useful life and a residual value of $30,000. Assume Seattle Inc. uses straight line method of depreciation.

The project's payback period is a. 2.31 years. b. 2.77 years. c. 2.57 years. d. 2.14 years.

Explanation / Answer

Actually I think it is 2.77.

Why? Cost is 180,000. Depreciation is (180,000-30,000)/6= 25,000.

So revenues are 70,000 and expenses other than depreciation are 5,000.

So cash flows of 65,000 on an expense of 180,000

2 years is 130,000. 50,000 left over divided by 65,000 is 0.77

2.77 year payback.

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