Calculate the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $65
Year 3 = $100
A)3.43 years
B)3.17 years
C)2.88 years
D)2.6 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After Year 1, $325 is recovered. After Year 2, $390 is recovered ($325 + $65). The remaining $60 is recovered in Year 3. Since $100 is received in Year 3, it takes 0.6 of a year to recover the remaining $60. Thus, the payback period is 2 + 0.6 = 2.6 years.

Calculate the Payback Period for a Project with the Following