Question

Calculate the payback period of the following project: The required initial investment is $322,990 and its expected life is 7 years. Expected annual net operating income from the project is $28,100, including depreciation of $42,270. At the end of the project, the salvage value of the assets is expected to be $27,100. (Ignore income taxes.):

Required:

The payback period is: (Round your answer to 2 decimal places.)

Answer 1

Payback period is the time required for the operating cash inflows to recover the initial investment in a project.

Here, the operating cash inflows are uniform, so we will use the following formula for payback period:

Payback period = Net initial investment / Annual net operating cash inflows

where, Net operating cash inflows = Net operating income + Depreciation expense.

Given: Initial investment = $322990, Net operating cash inflows = $28100 + $42270 = $70370

Putting these values in the above formula, we get,

Payback period = $322990 / $70370 = 4.59 years