A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost?

Question

Quizplus · Accepted Answer

To calculate the project's initial cost, we need to use the formula for traditional payback period (PB):

PB = Initial cost / Annual cash inflow

We are given that PB = 3.6 years and annual cash inflow = $50. Rearranging the formula, we get:

Initial cost = PB x Annual cash inflow = 3.6 x $50 = $180

Therefore, the initial cost of the project is $180, which is option C.

A Firm Is Evaluating a Capital Budgeting Project That Generates