Logan, Inc. is evaluating two possible investments in depreciable plant assets.

Question

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight - line method of depreciation. The following information is available:

Investment A

Investment B

Initial capital investment

$ 109, 000

$150, 000

Estimated useful life

10 years

                                 10 years

Estimated residual value

0

                            $ 22, 000

Estimated annual net cash inflow for 10 years

$ 28, 000                                  $40, 000

Required rate of return

12%                                             14%

Calculate the payback period for Investment A. (Round your answer to two decimal places.)

3.11 years

B. 1.00 year

C. 3.89 years

D. 2.33 years

Investment A

Investment B

Initial capital investment

$ 109, 000

$150, 000

Explanation / Answer

So at the end of 4th year the accumulated cash flow become positive so the pay back period

=3+$25,000/$28,000=3+0.89=3.89 Years

so the answer is C.3.89Years

year cash flow    Accumulated cash flow 0 -$109,000 -$109,000 1 $28,000 -$81,000 2 $28,000 -$53,000 3 $28,000 -$25,000 4 $28,000 $3,000

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