The following four-year project has an initial cost of $1,000,000. The future cash inflows for the next four years are $400,000, $300,000, $200,000, and $200,000, respectively. What is the payback period for this project?
A) 2.5 years.
B) 3.0 years.
C) 3.5 years.
D) 4.0 years.
E) 4.5 years.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the project to recover its initial investment. After 3 years, the cumulative cash inflow is $900,000 ($400,000 + $300,000 + $200,000). In the fourth year, an additional $100,000 is needed to reach the initial $1,000,000 investment, which takes 0.5 years. Thus, the payback period is 3.5 years.

The Following Four-Year Project Has an Initial Cost of $1,000,000