Joanne,Inc Calculate the Payback Period for Investment B

question 115

Multiple Choice

Joanne,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 110,000 & \$ 153,000 \\\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \\\hline \text { Estimated residual value } & 0 & \$ 30,000 \\\hline \text { Estimated annual net cash inflow for 10 years } & \$ 21,000 & \$ 46,000 \\\hline \text { Required rate of return } & 12 \% & 14 \% \\\hline\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)

• A) 3.33 years
• B) 1.83 years
• C) 3.81 years
• D) 5.24 years

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Definitions:

Liability Valuation

The process of determining the present value of future obligations or debts a company owes.

Bond Indenture Agreement

A legal contract outlining the terms and conditions between a bond issuer and the bondholders, including details of the bond issue and covenants.

Interest Expense

The cost incurred by an entity for borrowing funds, typically represented as a line item on the income statement reflecting the interest payable on any borrowings.

Maturity

The date on which the principal amount of a loan, bond, or other financial instrument is due to be paid in full.