Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c }
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300
\end{array}$$
A) 2.42 years
B) 1.96 years
C) 2.88 years
D) 2.47 years
E) 2.85 years

Question

Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300
\end{array}$$
A) 2.42 years
B) 1.96 years
C) 2.88 years
D) 2.47 years
E) 2.85 years

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. Here, by the end of Year 2, the project has recouped $150 + $200 = $350 of the initial $475 investment. In Year 3, it generates $300, but it only needs $125 more to break even. The fraction of the year needed to earn the additional $125 is $125/$300 = 0.4167 years. Therefore, the total payback period is 2 years + 0.4167 = 2.42 years.

Susmel Inc Year 0123 Cash flows −$475$150$200$300\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300\end{array} Year Cash flows ​0−$475​1$150​2$200​3$300​​

Susmel Inc $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300\end{array}$