(Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years.The annual net operating income from the project would be $66,000, which includes depreciation of $31,000.The scrap value of the project's assets at the end of the project would be $15,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years

Question

Tamaiya Bradford · Accepted Answer

Final Answer : C, Explanation :  The payback period can be calculated by dividing the initial investment by the annual net cash inflows.Payback period = Initial investment / Annual net cash inflowsIn this case, the initial investment is $263,000, and the annual net cash inflow is $66,000.Therefore, payback period = $263,000 / $66,000 = 3.98 or approximately 3.8 years.However, we also have to take into consideration the scrap value at the end of the project.The total cash inflow for the project would be:Total cash inflow = Annual net cash inflow x number of years + Scrap valueTotal cash inflow = $66,000 x 8 + $15,000Total cash inflow = $543,000The payback period can now be calculated as:Payback period = Initial investment / Annual net cash inflowsPayback period = $263,000 / ($543,000 / 8)Payback period = 2.7 years (rounded to one decimal place)Therefore, the best choice is C) 2.7 years.   Payback period = Investment required ÷ Annual net cash inflow= $263,000 ÷ $97,000 per year = 2.7 years

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