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The management of L Corporation is considering a project that would require an investment of $223,000 and would last for 6 years. The annual net operating income from the project would be $107,000, which includes depreciation of $16,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):.

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Answer:

Payback period = 1.813 years

Explanation:

If a project has equal annual cash-flows, the payback period can be  calculated using the formula:

[tex]Payback=\frac{CostOfMachine}{AnnualCashflows}[/tex]

The  annual cash-flow figure that is to be used in this calculation should not include depreciation as depreciation is a non-cash item. Net operating income from the project would be $107,000 and to get to annual cash-flows, depreciation should be added back.

Annual cash-flows would therefore be $107,000

[tex]AnnualCashflows=107,000+16,000=123,000[/tex]

As such:

[tex]Payback=\frac{223,000}{123,000}= 1.813years[/tex]

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