Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback?
A)2.03 years
B)2.25 years
C)2.50 years
D)2.75 years
E)3.03 years

Question

Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? 
A)2.03 years 
B)2.25 years 
C)2.50 years 
D)2.75 years 
E)3.03 years

Quizplus · Accepted Answer

To calculate payback period, we start by subtracting each year's cash inflows from the initial investment until the initial investment is fully recovered.
Year 1: - $1,100,000 + $300,000 = -$800,000
Year 2: -$800,000 + $400,000 = -$400,000
Year 3: -$400,000 + $500,000 = $100,000
Payback period = 2 + (Remaining investment ÷ Cash inflow in year 3) = 2 + ($400,000 ÷ $500,000) = 2.8 years or 2 years and 8 months.
So the closest answer is C)2.50 years.