Digital Corp is considering investing in project A. Their accountants gave them the following information: Initial investment: $1,200,000 Salvage Value: $340,000 Contribution Margin: $320,000 Present Value of Cash Flows: 4,580,000 Annual Cash Inflow: $850,000 Cost of Capital: 9% Length of project: 5 years What is the payback period

Question

Business

Milagros Acevedo

23 March, 02:02

Digital Corp is considering investing in project A. Their accountants gave them the following information: Initial investment: $1,200,000 Salvage Value: $340,000 Contribution Margin: $320,000 Present Value of Cash Flows: 4,580,000 Annual Cash Inflow: $850,000 Cost of Capital: 9% Length of project: 5 years What is the payback period

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Joyce Hardy · Answer 1

The payback period for the investment is 1.41 years

Explanation:

The payback period is the length of time it takes an investment to repay back the investment capital outlay committed to it at the inception of the project.

The payback period is computed as the initial investment divided by annual cash inflow

Initial investment is $1,200,000

Annual cash inflow is $850,000

Payback period=$1,200,000/$850,000 = 1.41 years

We can express the 0.41 in months=0.41*12=4.92 approximately 5 months