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Porter Company is analyzing two potential investments.   Project X Project YInitial investment $ 68,000 $ 60,000Net cash flow:    Year 1 24,000 4,000Year 2 24,000 26,000Year 3 24,000 26,000Year 4 0 20,000The payback period in years (rounded to 2 decimal places) for Project X is:

Question

Porter Company is analyzing two potential investments.   Project X Project YInitial investment 68,000 68,000 60,000Net cash flow:    Year 1 24,000 4,000Year 2 24,000 26,000Year 3 24,000 26,000Year 4 0 20,000The payback period in years (rounded to 2 decimal places) for Project X is:

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Solution

The payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment. It is calculated by dividing the initial investment by the net cash flow per period.

For Project X:

  1. The initial investment is $68,000.
  2. The net cash flow per year is $24,000 for the first three years.

To calculate the payback period, we divide the initial investment by the net cash flow per year:

68,000/68,000 / 24,000 = 2.83 years

So, the payback period for Project X is approximately 2.83 years when rounded to two decimal places.

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