A Company Is Evaluating Three Possible Investments What Is the Payback Period for Project A? (Assume That

question 28

Multiple Choice

A company is evaluating three possible investments.The following information is provided by the company.
$\begin{array}{|l|l|l|l|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 214,000 & \$ 54,000 & \$ 214,000 \\\hline \text { Salvage value } &0 & 22,000 & 24,000 \\\hline \text { Net cash flows: } & & & \\\hline \text { Year } 1 & 58,000 & 26,000 & 84,000 \\\hline \text { Year } 2 & 58,000 & 17,000 & 54,000 \\\hline \text { Year } 3 & 58,000 & 13,000 & 64,000 \\\hline \text { Year } 4 & 58,000 & 10,000 & 24,000 \\\hline \text { Year } 5 & 58,000 & 0& 0 \\\hline\end{array}$
What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)

• A) 2.7 years
• B) 5.0 years
• C) 3.7 years
• D) 2.1 years

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Definitions:

Retirement Of Bonds Payable

The process of paying off issued bond debt before its maturity date, removing the bonds from circulation.

Sale Of Investments

The process of selling investment assets such as stocks, bonds, or real estate, typically to generate cash or realize gains.

Depreciation Expense

The systematic allocation of the cost of a tangible asset over its useful life, representing the asset's consumption or the loss of its value over time.

Net Income

The total earnings of a company after subtracting all expenses from revenue, including taxes and operating costs, often referred to as the bottom line.