Practice Question
If a project has a cost of $100,000 and generates cash flows of $30,000 for 5 years, what is the payback period?
Answer +
B
Step-by-step solutions +
Step 1: Identify the initial investment and annual cash flow.
Initial Investment = $100,000
Annual Cash Flow = $30,000
Step 2: Use the payback period formula:
Payback Period = Initial Investment / Annual Cash Flow
Payback Period = $100,000 / $30,000 = 3.33 years
Conclusion: It will take slightly more than 3 years to recover the investment, so the payback period is approximately 4 years.
Initial Investment = $100,000
Annual Cash Flow = $30,000
Step 2: Use the payback period formula:
Payback Period = Initial Investment / Annual Cash Flow
Payback Period = $100,000 / $30,000 = 3.33 years
Conclusion: It will take slightly more than 3 years to recover the investment, so the payback period is approximately 4 years.