Project Rocket costs $10,000 to invest in and provides for cash flows of $4,000 in year 1,$5,000 in year 2,$2,000 in year 3 and $3,000 in year 4.What is the payback period for Project Rocket?
A)3 years
B)2.5 years
C)2.8 years
D)None of the above

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of year 2, the cumulative cash flow is $9,000 ($4,000 + $5,000). In year 3, an additional $1,000 is needed to reach the $10,000 investment, which takes 0.5 years of the $2,000 cash flow in year 3. Thus, the payback period is 2.5 years.

Project Rocket Costs $10,000 to Invest in and Provides for Cash