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Orange Corporation has gathered the following data on a proposed investment project: Investment in depreciable equipment $ 620,000 Annual net cash flows $ 86,000 Life of the equipment 10 years Salvage value $ 0 Discount rate 6 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment would be:

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Answer:

7.2 years

Explanation:

Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows.

Amount invested = $620,000

Cash flow = $86,000

Payback period = $620,000 / $86,000 = 7.2 years

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