Question

Everrett coffee is thinking of building a composting system for their spent coffee grounds. materials and labour to build the compost bins cost $750 the compost bins are expected to save the company $200 in trash collection services per year for the next 7 years. after that the bins will begin to break. their current cost of capital is 5% what is the payback of this project?

a. 3.75

b. 4.75

c. 5.00

d. none of these

e. 4.00

Answer 1

It is specifically to be noted in this question that payback period is demanded, so we will not be considering the discounting rate into this question and only normal cash flows will be considered because discounted payback periods are only used for calculation of discounted cash flows, whereas normal payback period will not be considering any kind of discounting in cash flows so we will not be discounting cash flows because this is asking for a normal payback period.

So cashback period would be= 2000+200+200= 600 paid in first 3 years.

Amount remaining= (750-600)= 150

Payback period= 3 years+(amount remaining/amount paid in next year)

= 3 years+ (150/200)

= 3.75 years.

Correct answer would be option (A)3.75 years