You are considering a project with an initial cost of $27,900. What is the payback period for this project if the cash inflows are $14,650, $16,190, $12,480, and $9,500 a year over the next four years, respectively?
A) 0.82 year
B) 0.90 year
C) 1.11 years
D) 1.82 years
E) 1.90 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. After the first year, the cumulative cash inflow is $14,650. After the second year, it is $30,840 ($14,650 + $16,190), which exceeds the initial cost of $27,900. The payback period is between the first and second year. The remaining amount to recover after the first year is $27,900 - $14,650 = $13,250. It takes $13,250/$16,190 = 0.82 of the second year to recover this amount. Therefore, the payback period is 1 + 0.82 = 1.82 years.

You Are Considering a Project with an Initial Cost of $27,900