Christine Robichaud, an engineer at Opus Ltd., has a $70 000 budget for upgrading the company's warehouse. She has calculated that the improvements could be completed in three months from now and would consume the entire budget. Due to these improvements the company saves $9 000 by the end of the first year, $14 000 by the end of the second year, and $35 000 by the end of the third year, $54 000 by the end of the fourth year and $17 000 by the end of the fifth year. What is the payback period for this project?
A)1
B)2
C)3
D)4
E)5

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. Here, the cumulative savings by the end of each year are: Year 1: $9,000; Year 2: $23,000 ($9,000 + $14,000); Year 3: $58,000 ($23,000 + $35,000); Year 4: $112,000 ($58,000 + $54,000); Year 5: $129,000 ($112,000 + $17,000). The initial investment of $70,000 is recouped between the third and fourth years, making the correct answer 4 years.

Christine Robichaud, an Engineer at Opus Ltd