If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?
A) 2 years
B) 2.5 years
C) 2.7 years
D) 3 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how many years it will take to recover the initial investment.

Year 1: $5,000 (cash inflow) - $20,000 (initial investment) = -$15,000 (cumulative cash flow)

Year 2: $8,000 (cash inflow) - (-$15,000) (cumulative cash flow) = -$7,000 (cumulative cash flow)

Year 3: $10,000 (cash inflow) - (-$7,000) (cumulative cash flow) = $3,000 (cumulative cash flow)

Year 4: $7,000 (cash inflow) - $3,000 (cumulative cash flow) = $4,000 (cumulative cash flow)

The payback period is the time it takes to reach a cumulative cash flow of zero.

Payback period = 2 + $3,000 ÷ $10,000 = 2.3 years

Therefore, the best answer choice is C) 2.7 years, which is the closest to 2.3 years.

If a Project Has an Initial Investment of $20,000 and Consecutive