1. The Seattle Corporation has been presented with an investment opportunity whi

Question

1.     The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $35,000 per year in Years 1 through 4, $40,000 per year in Years 5 through 9, and $40,000 in Year10. This investment will cost the firm $260,000 today, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

a.

5.23 years

b.

4.86 years

c.

7.00 years

d.

6.12 years

e.

4.35 years

  

a.

     

5.23 years

     

b.

     

4.86 years

     

c.

     

7.00 years

     

d.

     

6.12 years

     

e.

     

4.35 years

   The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $35,000 per year in Years 1 through 4, $40,000 per year in Years 5 through 9, and $40,000 in Year10. This investment will cost the firm $260,000 today, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

Explanation / Answer

Hi,

Please find the answer as follows:

Total Investment Cost = 260000

Investment Value Recovered in first 4 Years = 4*35000 = 140000

Balance Value of Investment 1200000 (260000 - 140000) be recovered in the next 3 Years = 40000*3 = 120000

Payback Period = 4+3 = 7 years

Option C (7 Years) is the correct answer.

Thanks.

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