Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$500
$150
$200
$300
A) 2.03 years
B) 2.25 years
C) 2.50 years
D) 2.75 years
E) 3.03 years

Question

Quizplus · Accepted Answer

To calculate payback, we add up the cash inflows until we reach the initial investment. 
For this project: 
Year 0: -$500 
Year 1: +$150 (Cumulative cash flow = -$350) 
Year 2: +$200 (Cumulative cash flow = -$150) 
Year 3: +$300 (Cumulative cash flow = $150) 
The payback period is the end of Year 2, plus the amount of time it takes to recover the remaining $150. 
Payback period = 2 + ($150/$200) = 2.75 years.