Practice Question
If a firm has a cash outflow of $75,000 and cash inflows of $30,000 for 4 years, what is the payback period?
Answer +
C
Step-by-step solutions +
Step 1: Use the payback period formula:
Payback Period = Initial Investment / Annual Cash Flow
Step 2: Plug in the values:
$75,000 / $30,000 = 2.5 years
Step 3: Interpret the result:
The firm will recover its investment in 2.5 years. Since exact timing may vary, this rounds to approximately 3 years for practical purposes.
Payback Period = Initial Investment / Annual Cash Flow
Step 2: Plug in the values:
$75,000 / $30,000 = 2.5 years
Step 3: Interpret the result:
The firm will recover its investment in 2.5 years. Since exact timing may vary, this rounds to approximately 3 years for practical purposes.