A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively. What is the payback period?
A) 2.70 years
B) 3.28 years
C) 3.36 years
D) 3.70 years
E) 2.28 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recover its initial costs. Here, the cash inflows over the years are $2,100, $3,140, $3,800, and $4,500. Adding these cumulatively: Year 1: $2,100, Year 2: $2,100 + $3,140 = $5,240, Year 3: $5,240 + $3,800 = $9,040. The initial cost of $7,900 is recovered between Year 2 and Year 3. To find the exact time, calculate the remaining amount to be recovered after Year 2 ($7,900 - $5,240 = $2,660) and divide by the Year 3 inflow ($2,660 / $3,800). This gives approximately 0.70 years. Therefore, the payback period is 2 years + 0.70 years = 2.70 years.

A Project Has an Initial Cost of $7,900 and Cash