Calculate the payback period (PP)for the cash flows provided in the table below.Note: The negative cash flow for year 0 is the initial investment for the project.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to calculate the cumulative cash flow each year until it becomes positive. 
Year 0 = -200,000
Year 1 = 50,000 - 60,000 = -10,000
Year 2 = 70,000 - 60,000 = 10,000
Year 3 = 90,000 - 60,000 = 30,000

The cumulative cash flow becomes positive in year 2, so the payback period is 2 years + ($10,000 ÷ $70,000) = 2.5 years. Therefore, the best choice is B with the payback period of 2.5 years.

Calculate the Payback Period (PP)for the Cash Flows Provided in the Table