Question

Buffy’s Bones, Inc. has an investment project has expected cash flows of $90,000 per year, has...

Buffy’s Bones, Inc. has an investment project has expected cash flows of $90,000 per year, has a cost of $270,000 and an expected life of three years. The firm is in the 21% tax bracket and is also associated with a previous sunk cost property purchase of $60,000. The project has a payback of 3.67 years.

TRUE FALSE ????

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Answer #1

Answer = False

Note:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3+ 0

= 3 years

Year Investment Cash Inflow Net Cash Flow
0 -2,70,000.00 -    -2,70,000.00 (Investment + Cash Inflow)
1 -    90,000.00 -1,80,000.00 (Net Cash Flow + Cash Inflow)
2 -    90,000.00 -90,000.00 (Net Cash Flow + Cash Inflow)
3 -    90,000.00 -    (Net Cash Flow + Cash Inflow)
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