An investment of $400,000 is expected to generate the following cash flows: $$\begin{array} { l r }
\text { Year 1 } & \$ 60,000 \
\text { Year 2 } & \$ 120,000 \
\text { Year 3 } & \$ 50,000 \
\text { Year 4 } & \$ 150,000 \
\text { Year 5 } & \$ 200,000
\end{array}$$ What is the investment's payback period?

Question

An investment of $400,000 is expected to generate the following cash flows: $$\begin{array} { l r } 
\text { Year 1 } & \$ 60,000 \
\text { Year 2 } & \$ 120,000 \
\text { Year 3 } & \$ 50,000 \
\text { Year 4 } & \$ 150,000 \
\text { Year 5 } & \$ 200,000
\end{array}$$ What is the investment's payback period?

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $400,000. The cash flows in the first three years total $230,000, which is less than the initial investment. In the fourth year, the cash flow is $150,000, which brings the total cash flow to $380,000. In the fifth year, the cash flow is $200,000, which brings the total cash flow to $580,000. This is more than the initial investment, so the payback period is 4 years.

An Investment of $400,000 Is Expected to Generate the Following