The payback period of a project that produces even cash flows each year is calculated by dividing

Question

Quizplus · Accepted Answer

The payback period is the time taken to recover the initial investment from the expected cash flows of the project. Since the project produces even cash flows each year, we can divide the net initial investment (the initial investment minus the salvage value) by the projected annual cash flow. Therefore, option A is the correct choice. Option B and D use the gross initial investment, which includes the salvage value, and thus may not give an accurate calculation of the payback period. Option C uses the net initial investment and projected annual cash inflows, which may lead to incorrect results as it doesn't take into consideration the recover of the initial investment.

The Payback Period of a Project That Produces Even Cash