A firm is evaluating a proposal which has an initial investment of €35,000 and has cash flows of €10,000 in year 1, €20,000 in year 2, and €10,000 in year 3. The payback period of the project is
A) between two and three years.
B) one year.
C) two years.
D) between one and two years.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cash inflows to cover the initial investment. Here, by the end of year 2, the total cash inflow is €30,000 (€10,000 in year 1 + €20,000 in year 2), which does not fully cover the initial investment of €35,000. It is only by some time in year 3 that the total cash inflows equal or exceed the initial investment, placing the payback period between two and three years.

A Firm Is Evaluating a Proposal Which Has an Initial