BTB Limited is investing £400,000 into a new project. The project will last for four years. At the end of the four years, the project assets will be sold for £100,000. Depreciation on project assets is provided on the straight line basis over four years. The net cash inflows from the project in years 1 to 4 are expected to be £150,000 per annum. What is the payback period for this project?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recover its initial investment. The project generates £150,000 annually. After 2 years, £300,000 is recovered. In the third year, an additional £100,000 is needed, which takes 8 months (100,000/150,000 * 12 months). Thus, the payback period is 2 years and 8 months.

BTB Limited Is Investing £400,000 into a New Project