Consider an investment with an initial cost of £20,000 and is expected to last for 5 years.The expected cash ﬂow 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 the above.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After 3 years, the cumulative cash flow is £15,500 (£5,000 + £5,000 + £5,500). In year 4, an additional £5,500 is received, totaling £21,000. To reach £20,000, it takes 3 full years and a fraction of the 4th year: £4,500 is needed in the 4th year, which is £4,500/£5,500 = 0.82 of a year. Thus, the payback period is 3.82 years.

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