Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years. The expected cash flows in years 1 and 2 are $5,000,in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.
A) 3.18 years
B) 3.82 years
C) 4.00 years
D) 4.55 years
E) None of these.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of year 3, the cumulative cash flow is $15,500 ($5,000 + $5,000 + $5,500). In year 4, an additional $5,500 is received. To recover the remaining $4,500 ($20,000 - $15,500), it takes 4,500/5,500 = 0.82 of a year. Therefore, the payback period is 3 + 0.82 = 3.82 years.

Consider an Investment with an Initial Cost of $20,000 and Is