A project has an initial cost of $6,500.The cash inflows are $900,$2,200,$3,600,and $4,100 over the next four years,respectively.What is the payback period?
A)1.73 years
B)2.51 years
C)2.94 years
D)3.51 years
E)3.94 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to add up the cash inflows until we recover the initial cost of the project.

Year 1: $900 (remaining cost: $5,600)
Year 2: $2,200 (remaining cost: $3,400)
Year 3: $3,600 (remaining cost: $800)
Year 4: $4,100 (remaining cost: -$3,300)

The payback period occurs at the end of year 3, when the remaining cost becomes negative. Therefore, the payback period is 3 years + ($800 / $3,600 Year 3 cash inflow) = 3.22 years. Rounded to two decimal places, the payback period is 2.94 years.

Choice C is the best answer as it is the closest choice to the calculated payback period.

A Project Has an Initial Cost of $6,500