Practice Problem – Payback Period Rule

Practice Question

Cases in Finance
Capital Budgeting
Payback Period Rule
Short Answer

If a company has an initial investment of $50,000 and cash inflows of $15,000 for the first three years, what is the payback period?

Answer +
B
Step-by-step solutions +
The payback period is calculated by summing annual cash inflows until the initial investment is recovered:
  • Year 1: $15,000
  • Year 2: $15,000 (cumulative: $30,000)
  • Year 3: $15,000 (cumulative: $45,000)
After 3 years, only $45,000 has been recovered. To recover the remaining $5,000 in Year 4 (assuming another $15,000 cash inflow), it would take one-third of the year. So:
Payback Period = 3 + (5,000 / 15,000) = 3.33 years.