Use the table for the question(s)below.
Consider a project with the following cash flows:

-Assume the appropriate discount rate for this project is 15%. The payback period for this project is closest to:
A)2
B)4
C)2.5

Question

Use the table for the question(s)below.
Consider a project with the following cash flows:
 
-Assume the appropriate discount rate for this project is 15%. The payback period for this project is closest to:
A)2 
B)4 
C)2.5

Quizplus · Accepted Answer

To calculate the payback period, we need to add up the cash flows until the sum equals the initial investment.

In this case, the initial investment is -$1,000.

Year 1 cash flow = $300, remaining balance = -$700 
Year 2 cash flow = $400, remaining balance = -$300 
Year 3 cash flow = $500, remaining balance = $200

Therefore, the payback period is between Year 2 and Year 3. To find a more exact answer, we can use the formula:

Payback period = (Number of years before full recovery) + (Unrecovered cost at the beginning of the year / Cash flow during the year)

Payback period = 2 + (-$300 / $500) = 2.6

The closest answer choice is C) 2.5.

Use the Table for the Question(s)below