Sara Flea Collar Inc.is evaluating an overseas expansion that will cost $1 million and is expected to generate the following cash flows: year 1: -$250,000; year 2: +$450,000; year 3: +$550,000; and year 4: +$800,000.What is the payback period?
A) 3.00 years
B) 3.13 years
C) 3.31 years
D) 3.75 years
E) 4.00 years

Question

Quizplus · Accepted Answer

Step 1 - Build a payback table with the cash flows like the following:
 11ea7fdb_fbe4_744f_a768_09b8343ee6f7_TB2902_00 Step 2 - We see that the project turns positive in the fourth year, we need the amount of that year needed to finish recouping the investment. 11ea7fdb_fbe4_9b60_a768_bb6776aaf53b_TB2902_11 = .31 + 3 full years = 3.31 years payback period