A company is considering two projects.
$$\begin{array} { l l l }
& \text { Project A } & \text { Project B } \
\text { Initial investment } & \$ 150,000 & \$ 150,000 \
\text { Cash inflow Year 1 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 2 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 3 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 4 } & \$ 50,000 & \$ 60,000 \
\text { Cash inflow Year 5 } & \$ 50,000 & \$ 80,000
\end{array}$$
-Refer to the Figure.What is the payback period for Project B?

Question

A company is considering two projects.
 $$\begin{array} { l l l } 
& \text { Project A } & \text { Project B } \
\text { Initial investment } & \$ 150,000 & \$ 150,000 \
\text { Cash inflow Year 1 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 2 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 3 } & \$ 50,000 & \$ 40,000 \
\text { Cash inflow Year 4 } & \$ 50,000 & \$ 60,000 \
\text { Cash inflow Year 5 } & \$ 50,000 & \$ 80,000
\end{array}$$
-Refer to the Figure.What is the payback period for Project B?

Quizplus · Accepted Answer

The payback period for Project B is calculated by adding the cash inflows each year until the initial investment is recovered. For Project B, the cash inflows are \$40,000 for the first three years, and then \$60,000 in the fourth year. By the end of the third year, a total of \$120,000 (3 years * \$40,000/year) is recovered, which is less than the initial investment of \$150,000. By adding the cash inflow of the fourth year (\$60,000), the total recovered amount becomes \$180,000, which exceeds the initial investment. Therefore, the payback period is during the fourth year, but since it doesn't take the full year to recover the initial investment, it's less than 4 years. The exact point within the fourth year can't be determined without monthly or daily cash inflows, but it's clear that the payback period is more than 3 years but less than 4 years, making 3.5 years the closest correct choice.

A Company Is Considering Two Projects -Refer to the Figure