Question

Today, Martha's Wines is investing $259,000 in some new wine-making equipment. The firm expects the cash...

Today, Martha's Wines is investing $259,000 in some new wine-making equipment. The firm expects the cash flows to increase by $50,000 a year for the next 2 years and $80,000 a year for the following 3 years. How long must the firm wait until it recovers all of its initial investment?

A. 1.75 years
B. 2.94 years
C. 2.98 years
D. 3.00 years
E. 3.99 years

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Homework Answers

Answer #1

The question is solved by computing the payback period.

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 3 years + $79,000/ $80,000

                              = 3 years + 0.99

                              = 3.99 years.

Hence, the answer is option e.

In case of any query, kindly comment on the solution.

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