You are considering a project with an initial cost of $7,500.What is the payback period for this project if the cash inflows are $1,100,$1,640,$3,800,and $4,500 a year over the next four years,respectively?
A)3.21 years
B)3.28 years
C)3.36 years
D)4.21 years
E)4.29 years

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the cash inflows each year until the initial investment is recovered. Here, the cumulative cash inflows are: Year 1: $1,100, Year 2: $1,100 + $1,640 = $2,740, Year 3: $2,740 + $3,800 = $6,540, and Year 4: $6,540 + $4,500 = $11,040. The initial investment of $7,500 is recovered between Year 3 and Year 4. To find the exact payback period: $7,500 - $6,540 = $960 to be recovered in Year 4. $960/$4,500 = 0.213 years. Adding this to the 3 years gives a payback period of 3.21 years.

You Are Considering a Project with an Initial Cost of $7,500.What