Taggart Inc. is considering a project that has the following cash flow data. What is the projects payback? Year 0 1 2 3 Cash flows -$1,15

Taggart Inc. is considering a project that has the following cash flow data. What is the projects payback? Year 0 1 2 3 Cash flows -$1,150 $500 $500 $500 Select one: a. 1.86 years b. 2.07 years c. 2.30 years d. 2.53 years e. 2.78 years

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  1. Answer:

    The period of payback of the project is 2.30 years. Therefore, the correct answer is C

    Explanation:

    We will computing the Cumulative Cash Flow from Year 0 to Year 3

    Cumulative Cash Flow Year 0 = Cash Flow of Year 0

    = -$1,150

    Cumulative Cash Flow of Year 1 = Cash Flow of Year 1 + Cash Flow of Year 0

    = $500 + (-$1,150)

    = -$650

    Cumulative Cash Flow of Year 2 =  Cash Flow of Year 2 + Cumulative Cash Flow Cash Flow of Year 1

    = $500 + (-$650)

    = -$150

    Cumulative Cash Flow of Year 3 =  Cash Flow of Year 3 + Cumulative Cash Flow Cash Flow of Year 2

    = $500 + (-$150)

    = $350

    Now, Computing the Pay back period with the formula:

    Pay back period = 2 + (Cumulative Cash Flow of year 2 / Cash flow of year 3)

    = 2 + (-$150/ $500)

    = 2 +  0.3

    = 2.3 years

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