If a proposed investment's payback period is 3 years, its initial cost is $50,000, and its useful life is 10 years, which of the following must be true?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for an investment to recoup its initial cost. In this case, the investment's payback period is 3 years and its initial cost is $50,000. Therefore, the cash inflows over the first three years must total $50,000 in order for the investment to pay back its initial cost. Option A is incorrect because it refers to cash inflows over the investment's useful life, not just the payback period. Option C is incorrect because accounting profits generated over the first three years may not necessarily equal the cash inflows. Option D is incorrect because we have already determined that option B must be true.

If a Proposed Investment's Payback Period Is 3 Years, Its