ACCA FM · Chapter 6 · Question 1 of 10
A project requires an initial investment of $400k. Net cash inflows are expected to be ($000): year 1 90, year 2 120, year 3 150, year 4 160, year 5 100. Cash flows arise evenly through each year. What is the payback period?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 3.25 years
Explanation
Cumulative cash flows ($000): year 1 -310, year 2 -190, year 3 -40, year 4 +120. Payback occurs during year 4: 3 years + 40/160 = 3.25 years (3 years 3 months). Dividing by the year 5 cash flow gives 3.40 years, and using the average annual inflow (124) gives 3.23 years, which ignores the timing of the flows.
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