You are considering a project with an initial cost of $27,900. What is the payback period for this project if the cash inﬂows are $14,650, $16,190, $12,480, and $9,500 a year over the next four years,
Respectively?
A) 0.82 year
B) 0.90 year
C) 1.11 years
D) 1.82 years
E) 1.90 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. After the first year, the cumulative cash inflow is $14,650. After the second year, it is $30,840 ($14,650 + $16,190), which exceeds the initial cost of $27,900. Therefore, the payback period is between 1 and 2 years. The exact payback period is 1 year plus the fraction of the second year needed to recover the remaining $13,250 ($27,900 - $14,650), which is $13,250/$16,190 = 0.82 years. Thus, the payback period is 1.82 years.

You Are Considering a Project with an Initial Cost of $27,900