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(Ignore income taxes in this problem.) The Keego Company is planning a $200,000

ID: 2386494 • Letter: #

Question

(Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment:

Year

Cash Inflows
1

$120,000
2

60,000
3

40,000
4

40,000
5

40,000
Total

$300,000


Assuming that the cash inflows occur evenly over the year, the payback period for the investment is _______ years.

A. 2.50
B. 0.75
C. 1.67
D. 4.91
***Please SHOW HOW to get this

Explanation / Answer

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment:

Year

Cash Inflows
1

$120,000
2

60,000
3

40,000
4

40,000
5

40,000
Total

$300,000


Assuming that the cash inflows occur evenly over the year, the payback period for the investment is _______ years.

ANSWER =          A. 2.50

$200,000-----120,000=80,000

80,000---60,000=20,000

20,000/40,000=0.5

0.5 X5=2.5YEARS