Question

1. The Cavendish Company is considering a project with an initial investment of $8 million that has an accounting rate of return of 25%. The project will generate an annual net cash flow of $1.75 million and annual net operating income of $2 million. What is the project's payback period?

• 8.00 years

• 3.00 years

• 4.00 years

• 4.57 years

2. Yoshizawa Corporation is working on a project that will require an initial investment of $12 million. The project has a life of 5 years. Expected annual net cash flows for years 1 to 5 are: $5,000,000; $4,500,000; $3,000,000; $4,000,000; and $4,500,000. What is this project's payback period? (Assume that net cash flow is uniform throughout the year.)

• 8.00 years

• 3.00 years

• 2.83 years

• 4.57 years

Answer 1

Ans 1
	Payback period = Initial investment/Annul cash flow
			8000000/1750000
			4.57	Year
	Ans =		4.57	Year
Ans 2
	Year	Cash flow	Cumulative cash flow
	0	(12,000,000)	(12,000,000)
	1	5,000,000	(7,000,000)
	2	4,500,000	(2,500,000)
	3	3,000,000	500,000
	4	4,000,000	4,500,000
	5	4,500,000	9,000,000
	therefore Payback period =	2+2500000/3000000
			2.83	Year
		Ans =	2.83	Year