A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to see how long it takes for the net cash inflows to pay back the initial investment ($100,000).

Year 1: $100,000 - $28,000 = $72,000 remaining
Year 2: $72,000 - $28,000 = $44,000 remaining
Year 3: $44,000 - $28,000 = $16,000 remaining
Year 4: $16,000 - $28,000 = -$12,000 (payback is in year 3)
 
Therefore, the payback period is 3 years and 1/12 of a year, or approximately 3.57 years. The best choice is C.

A Project Requires an Initial Outlay of $100,000, and Is