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 payback occurs during year 5. The exact payback period is 4 years plus the remaining $75,000 needed to recover the initial $500,000, which takes 0.1 of year 5 ($75,000/$750,000), totaling 4.1 years.

A Project Manager Is Using the Payback Method to Make