Question

• James Construction Co. is considering a new inventory system that will cost $950,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $350,000 in year two, $150,000 in year three, and $250,000 in year four. The required rate of return is 8%. What is the payback period of this project?

A) 4.00 years

B) 3.56 years

C) 3.40 years

D) 3.31 years

C is the correct answer, please show how you arrive at that answer

Answer 1

I have answered the question below

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Answer:

Payback	For payback period discount rate is taken as 0%
Discount	0%
Year	0	1	2	3	4
Project A	-950000.00	350000.00	350000.00	150000.00	250000.00
CDCF	-950000.00	-600000	-250000	-100000	150000
Payback	2.50	Years

Payback period = 3+ absolute(100000/250000) = 3.4 years

( Because at between 3 and 4 th year the CDCF turns positive)