Lamb Ltd is evaluating an investment proposal using the payback method. Cash inflows are expected to be $3000 in year 1, $3500 in year 2, $5000 in year 3, and $4500 in year 4. The initial investment required is $7000. Assuming even cash inflows within each year what is the payback period?

Question

Quizplus · Accepted Answer

To find the payback period, we need to determine the amount of time it will take for the cumulative cash inflows to equal the initial investment of $7000.

Year 1: $3000
Year 2: $3500
Year 3: $5000
Year 4: $4500

Cumulative cash inflows:
Year 1: $3000
Year 2: $6500
Year 3: $11500
Year 4: $16000

It takes 2 years and $1500 of the third year's inflow to reach $7000. Therefore, the payback period is 2.1 years, making option B) the best choice.

Lamb Ltd Is Evaluating an Investment Proposal Using the Payback