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you are considering a project with an initial cost of $4,300. what is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for years 1 to 4, respectively? a) 2.04 years b) 2.36 years c) 2.89 years d) 3.04 years e) 3.36 years

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ayune

For the given initial investment and cash inflows, the payback period for the project is 3.36 years (option e)

Payback period is the period where the initial investment is paid back by the cash inflows.

Data from the problem:

Initial investment = $4,300

Cash inflows:

Year   Cash inflows   Accumulated cash inflows

1            $550                   $550

2           $970                  $1520

3        $2,600                  $4120

4           $500                  $4620

Notice that at the end of the 3rd year, the accumulated cash inflows is $4120, while the initial investment is $4,300. Hence, we need $4,300 - $4,120 = $180 more to make the accumulated cash inflows equal to the initial investment.

Since, the cash inflows at the 4th year is $500, it is expected that $180 will be obtained within:

180/500 = 0.36 year

Therefore, total period = 3 years + 0.36 year = 3.36 years

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