A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the non-discounted payback of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -\$ 500,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 75,000 \
\hline 3 & \$ 150,000 \
\hline 4 & \$ 150,000 \
\hline 5 & \$ 750,000 \
\hline
\end{array}$$
A)3.7 years
B)4.1 years
C)5.0 years
D)4.8 years

Question

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the non-discounted payback of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -\$ 500,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 75,000 \
\hline 3 & \$ 150,000 \
\hline 4 & \$ 150,000 \
\hline 5 & \$ 750,000 \
\hline
\end{array}$$
A)3.7 years
B)4.1 years
C)5.0 years
D)4.8 years

Quizplus · Accepted Answer

The non-discounted payback period is the time it takes for the cumulative cash flows to equal the initial investment. By year 4, the cumulative cash flow is $425,000. In year 5, an additional $750,000 is received, so the remaining $75,000 needed to reach $500,000 is achieved in 0.1 years (75,000/750,000), making the payback period 4.1 years.

A Project Manager Is Using the Payback Method to Make