An outlay of $180,000 is expected to yield the following cash flows: Year Net Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the payback period?

Question

Quizplus · Accepted Answer

The payback period is the amount of time it takes for an investment to generate enough cash flow to cover the initial investment. In this case, the initial investment is $180,000. The net cash flow in year 1 is $75,000, so the remaining investment is $105,000. The net cash flow in year 2 is $55,000, so the remaining investment is $50,000. The net cash flow in year 3 is $60,000, so the remaining investment is $0. Therefore, the payback period is 3 years.

An Outlay of $180,000 Is Expected to Yield the Following