A project costs $475 and has cash ﬂows of $100 for the ﬁrst three years and $75 in each of the project's last ﬁve years. What is the payback period of the project?
A) The project never pays back.
B) 4.75 years
C) 5.00 years
D) 5.33 years
E) 6.00 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After 3 years, the project has generated $300 ($100 x 3). In the next 2 years, it generates $150 ($75 x 2), totaling $450. In the 6th year, it needs $25 more to reach $475, which takes 1/3 of a year ($25/$75), making the payback period 5.33 years.

A Project Costs $475 and Has Cash ﬂOws of $100