Chester Manufacturing is considering a project that will require an initial investment of $50,000 and is expected to generate future cash flows of $20,000 for years 1 through 3 and $10,000 for years 4 through 7. The project's payback period is:

Question

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The payback period is the time it takes for the initial investment to be recovered from the cash flows. In this case, $20,000 is received each year for the first 3 years. By the end of year 2, $40,000 is recovered. In year 3, an additional $10,000 is needed to recover the full $50,000, which takes half a year. Thus, the payback period is 2.5 years.

Chester Manufacturing Is Considering a Project That Will Require an Initial