A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________.
A) 1 year
B) 2 years
C) between 1 and 2 years
D) between 2 and 3 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cash inflows to cover the initial investment. Here, by the end of year 2, the total cash inflow is $30,000 ($10,000 in year 1 + $20,000 in year 2), which does not cover the initial investment of $35,000. By the end of year 3, with an additional $10,000, the total inflow is $40,000, covering the investment. Thus, the payback period is between 2 and 3 years.

A Firm Is Evaluating a Proposal Which Has an Initial