Arrendo,Inc Calculate the Payback Period for Investment B

question 20

Multiple Choice

Arrendo,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 107,000 & \$ 159,000 \\\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \\\hline \text { Estimated residual value } & 0 & \$ 26,000 \\\hline \text { Estimated annual net cash inflow for 10 years } & \$ 28,000 & \$ 46,000 \\\hline \text { Required rate of return } & 10 \% & 14 \% \\\hline\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)

• A)3.46 years
• B)1.94 years
• C)2.89 years
• D)3.82 years

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Definitions:

Dividends

Funds distributed by a company to its shareholders, representing a share of the company's earnings.

Flotation Costs

Costs a company bears when issuing new securities, covering underwriting fees, legal expenses, and registration charges.

Constant Growth

A situation where an economic, financial, or business variable grows at a steady and unvarying rate over time.

Retained Earnings

The portion of a company's profits not distributed to shareholders as dividends but kept within the company for reinvestment or to pay off debt.