A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?
A) The project never pays back.
B) 4.75 years
C) 5.00 years
D) 5.33 years
E) 6.00 years

Question

Quizplus · Accepted Answer

The payback period is the number of years it takes for the project to generate enough cash flow to cover the initial investment. In this case, the initial investment is $475. The project generates $100 in cash flow for the first three years and $75 in each of the project's last five years. So, the total cash flow over the project's eight-year life is $100 x 3 + $75 x 5 = $675. The payback period is the number of years it takes for the project to generate $475 in cash flow. So, the payback period is 475 / 675 = 5.00 years.

A Project Costs $475 and Has Cash Flows of $100