A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?
A) 3.73 years
B) 2.51 years
C) 3.13 years
D) 3.51 years
E) 3.94 years

Question

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?
A) 3.73 years 
B) 2.51 years
C) 3.13 years 
D) 3.51 years
E) 3.94 years

Quizplus · Accepted Answer

To find the payback period, we need to calculate the cumulative cash inflows until they equal the initial cost of the project.
Year 1: $850
Year 2: $850 + $2,400 = $3,250
Year 3: $3,250 + $3,100 = $6,350
Year 4: $6,350 + $4,100 = $10,450

The payback period is the time it takes to reach the initial cost, which is in year 3, but not fully. So, we calculate the remaining amount to be paid back in the fourth year, which is $6,900 - $6,350 = $550. This is paid back in year 4, so the payback period is 3 + ($550/$4,100) = 3.13 years. Therefore, the best choice is C.

A Project Has an Initial Cost of $6,900