Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Introduction to Ratios

Financial Accounting

14. Financial Statement Analysis

Introduction to Ratios

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Multiple Choice

A project has the following cash flows:\[\begin{align}\text{Year 0:} & \ -\$10,000 \\\text{Year 1:} & \ +\$3,000 \\\text{Year 2:} & \ +\$4,000 \\\text{Year 3:} & \ +\$5,000 \end{align}\]What is the payback period for this project?

1.8 years

2.2 years

3.0 years

2.5 years

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Verified step by step guidance

Step 1: Understand the concept of the payback period. The payback period is the time it takes for the cumulative cash flows from a project to equal the initial investment. It is calculated by summing the cash flows year by year until the initial investment is recovered.

Step 2: Start by identifying the initial investment, which is the cash flow at Year 0. In this case, the initial investment is -$10,000.

Step 3: Add the cash flows from subsequent years to the initial investment cumulatively. For Year 1, the cash flow is $3,000. Subtract this from the initial investment: -$10,000 + $3,000 = -$7,000. The project has not yet recovered the initial investment.

Step 4: For Year 2, the cash flow is $4,000. Add this to the cumulative cash flow from Year 1: -$7,000 + $4,000 = -$3,000. The project still has not recovered the initial investment.

Step 5: For Year 3, the cash flow is $5,000. Add this to the cumulative cash flow from Year 2: -$3,000 + $5,000 = $2,000. The project recovers the initial investment during Year 3. To calculate the exact payback period, divide the remaining amount to be recovered ($3,000 at the end of Year 2) by the cash flow in Year 3 ($5,000), and add this fraction to the number of years already passed (2 years).