Consider an investment with an initial cost of $20,000 that expected to last for 5 years.The expected cash flows in Years 1 and 2 are $5,000 each,in Years 3 and 4 are $5,500 each,and the Year 5 cash flow is $1,000.Assume each annual cash flow is spread evenly over its respective year.What is the payback period?
A)3.18 years
B)3.82 years
C)4.00 years
D)4.55 years
E)None of these

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of Year 3, the cumulative cash flow is $15,500. By the end of Year 4, it is $21,000. Therefore, the payback period is 3 years plus the fraction of Year 4 needed to recover the remaining $4,500 ($20,000 - $15,500), which is $4,500/$5,500 = 0.82 years. Thus, the payback period is 3.82 years.

Consider an Investment with an Initial Cost of $20,000 That