A 30 year project is estimated to cost $35 million and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the company's required rate of return is 10%, determine the payback of the project.
A) 6.50 years
B) 7.00 years
C) 7.50 years
D) 8.00 years
E) 8.50 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recover its initial investment. In this case, the project recovers $5 million annually for the first 5 years, totaling $25 million. In the 6th year, an additional $4 million is recovered, totaling $29 million. By the 7th year, another $4 million is recovered, reaching $33 million. In the middle of the 8th year, the remaining $2 million is recovered, making the payback period approximately 7.5 years.

A 30 Year Project Is Estimated to Cost $35 Million