Training cost $6,500 and a project required an initial investment of $47,500. If the project yields monthly savings of $3,500 beginning after 4 months, what is the payback period in months, before money costs and taxes?

Question

Quizplus · Accepted Answer

To calculate payback period, we need to determine the time it takes for the monthly savings to cover the initial investment and training cost.

First, we calculate the total cost: 
Total cost = initial investment + training cost 
Total cost = $47,500 + $6,500 
Total cost = $54,000

Next, we calculate the monthly cash inflows: 
Monthly savings = $3,500

We can use a cumulative cash flow table to determine the payback period:

| Period | Cash Inflow | Cumulative Cash Flow | 
|--------|------------|---------------------| 
| 0      | -$54,000   | -$54,000            | 
| 1      | $3,500     | -$50,500            | 
| 2      | $3,500     | -$47,000            | 
| 3      | $3,500     | -$43,500            | 
| 4      | $3,500     | -$40,000            | 
| 5      | $3,500     | -$36,500            | 
| 6      | $3,500     | -$33,000            | 
| 7      | $3,500     | -$29,500            | 
| 8      | $3,500     | -$26,000            | 
| 9      | $3,500     | -$22,500            | 
| 10     | $3,500     | -$19,000            | 
| 11     | $3,500     | -$15,500            | 
| 12     | $3,500     | -$12,000            | 
| 13     | $3,500     | -$8,500             | 
| 14     | $3,500     | -$5,000             | 
| 15     | $3,500     | -$1,500             | 
| 16     | $3,500     | $2,000              |

The payback period is between 15 and 16 months, so the best choice is C) 19.4 because it is the closest option to the calculated payback period.

Training Cost $6,500 and a Project Required an Initial Investment