Yates, Inc is evaluating two possible investments in depreciable plant assets
The company uses the straight-line method of depreciation. The following information is available:
Investment A Investment B
Initial capital investment $275,000 $225,000
Estimated useful life 8 years 7 years
Estimated residual value $15,000 $20,000
Estimated annual net cash inflow for 10 years $55,000 $35,000
Required rate of return 12% 12%
Compute the payback period for each investment. Show your calculations and round to one decimal place.
What will be an ideal response
Payback for Investment A = Amount invested / Expected annual net cash flow
= $275,000 / $55,000 = 5 years
Payback for Investment B = Amount invested / Expected annual net cash flow
= $225,000 / $35,000 = 6.4 years
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