Rowan Dental invests $500,000 in equipment expected to generate after-tax cash inflows of $120,000, $150,000, $180,000 and $200,000 in Years 1 to 4. Assuming even cash flows within each year, what is the payback period?

Correct answer: A) 3.25 years

Explanation

Cumulative inflows: Year 1 $120,000; Year 2 $270,000; Year 3 $450,000. $50,000 remains to be recovered in Year 4, when $200,000 is received: $50,000 / $200,000 = 0.25 year. Payback = 3 + 0.25 = 3.25 years. Dividing the investment by average annual inflow (3.08 years) is only valid for even cash flows.