Project Kappa will cost $80,000 and is expected to pay back $20,000, $30,000, $25,000, $25,000, $10,000, and $10,000 at the end of each of the following six years. What is its payback period?
A)2 years
B)5 years
C)4 years
D)3 years

Question

Quizplus · Accepted Answer

To calculate the payback period, we add up the cash inflows until we reach the initial investment cost of $80,000. 
Year 1: $20,000
Year 2: $20,000 + $30,000 = $50,000
Year 3: $50,000 + $25,000 = $75,000
Year 4: $75,000 + $25,000 = $100,000 - this is where we reach the initial investment cost, so the payback period is 4 years. 
Since the payback period is shorter than the project's life span (6 years), this project could be considered acceptable. To determine the payback period, we need to calculate the cumulative cash inflows each year until the initial investment of $80,000 is fully recovered. 
Year 1: $20,000 (cumulative cash inflow = $20,000)
Year 2: $30,000 (cumulative cash inflow = $50,000)
Year 3: $25,000 (cumulative cash inflow = $75,000)
Year 4: $25,000 (cumulative cash inflow = $100,000)
Since the payback period is defined as the time it takes to recover the initial investment, we can see that the $80,000 investment is fully recovered by the end of Year 4, with a cumulative cash inflow of $100,000. Therefore, the payback period is 4 years. Option C is the correct answer.

Project Kappa Will Cost $80,000 and Is Expected to Pay