Determine the payback period from the following. Investment equipment with an eight-year useful life costs $1 000 000. Annual cash flows increase by $200 000 each year. The payback period is:

Question

Quizplus · Accepted Answer

The payback period is calculated by adding the annual cash flows until the initial investment is recovered. The cash flows increase by $200,000 each year, so the cumulative cash flow each year would be: Year 1: $200,000, Year 2: $400,000 (total $600,000), Year 3: $600,000 (total $1,200,000). Therefore, the investment is fully recovered in just before the end of Year 3, making the closest full year for payback 5 years.

Determine the Payback Period from the Following