Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![**Project Payback Period Calculation**
Worthington Inc. is evaluating a project based on the following cash flow data. The objective is to determine the payback period of the project.
**Cash Flow Data:**
- **Year 0:** Initial Investment = -$500
- **Year 1:** Cash Inflow = $150
- **Year 2:** Cash Inflow = $200
- **Year 3:** Cash Inflow = $300
**Payback Period Options:**
- 2.03 years
- 2.25 years
- 2.50 years
- 2.75 years
- 3.03 years
**Explanation:**
To calculate the payback period, we look at how long it takes for the initial investment of $500 to be recovered through the net cash inflows.
1. **Year 1:**
- Cumulative cash flow = -$500 (initial) + $150 = -$350
2. **Year 2:**
- Cumulative cash flow = -$350 + $200 = -$150
3. **Year 3:**
- Cumulative cash flow = -$150 + $300 = $150
The initial investment is fully recovered between Year 2 and Year 3. To be precise, calculate the fraction of Year 3 required to recover the remaining $150:
\[ \text{Fraction of Year 3} = \frac{\text{Unrecovered Investment at End of Year 2}}{\text{Cash Inflow of Year 3}} = \frac{150}{300} = 0.5 \]
Thus, the total payback period is 2.5 years.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe5b2b20d-049f-4dcf-af25-64fd11186c52%2F240e7a27-a8fd-4946-a316-e877348a13fb%2Fgcsqzh_processed.png&w=3840&q=75)
Transcribed Image Text:**Project Payback Period Calculation**
Worthington Inc. is evaluating a project based on the following cash flow data. The objective is to determine the payback period of the project.
**Cash Flow Data:**
- **Year 0:** Initial Investment = -$500
- **Year 1:** Cash Inflow = $150
- **Year 2:** Cash Inflow = $200
- **Year 3:** Cash Inflow = $300
**Payback Period Options:**
- 2.03 years
- 2.25 years
- 2.50 years
- 2.75 years
- 3.03 years
**Explanation:**
To calculate the payback period, we look at how long it takes for the initial investment of $500 to be recovered through the net cash inflows.
1. **Year 1:**
- Cumulative cash flow = -$500 (initial) + $150 = -$350
2. **Year 2:**
- Cumulative cash flow = -$350 + $200 = -$150
3. **Year 3:**
- Cumulative cash flow = -$150 + $300 = $150
The initial investment is fully recovered between Year 2 and Year 3. To be precise, calculate the fraction of Year 3 required to recover the remaining $150:
\[ \text{Fraction of Year 3} = \frac{\text{Unrecovered Investment at End of Year 2}}{\text{Cash Inflow of Year 3}} = \frac{150}{300} = 0.5 \]
Thus, the total payback period is 2.5 years.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education