Finance: Capital Budgets

Question

An entrepreneur invests in his dream business of selling golf-carts. The initial investment is $275,199.00. The entrepreneur expects to generate an annual after-tax cash flow of $57,342.00 in running this business.

How long before the project will pay back?

(Answer Format: Number: Round to: 2 decimal places.)

Answer 1

Hi Mark!

Payback measures the number of time periods (in this case, years) it takes to recover the initial investment.

We want to calculate how many years it takes to recover an initial investment of $275,199. We know we receive $57,342 per year.

$275,199 divided by $57,342 gives us 4 full years plus a left over of $45,831.

Dividing this left over of $45,831 by $57,342 gives us 0.799 years.

So the total payback period is 4 years + 0.799 years = 4.799 years (4.80 years to 2 d.p.)

Another way to write this is 4 years and 10 months (0.799 x 12).

Hope this helps!

Anna