Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.
A) 3.18
B) 3.82
C) 4.55
D) 4.00

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of year 3, the cumulative cash flow is $15,500 ($5,000 + $5,000 + $5,500). In year 4, an additional $5,500 is received. To recover the remaining $4,500 ($20,000 - $15,500), it takes 4,500/5,500 of year 4, which is approximately 0.82 years. Thus, the payback period is 3 + 0.82 = 3.82 years.

Consider an Investment with an Initial Cost of $20,000 and Is