ACCA MA · Chapter 11 · Question 2 of 10
A project costs $120,000 now and is expected to generate cash inflows of $30,000 in Year 1, $40,000 in Year 2, $45,000 in Year 3 and $50,000 in Year 4. Assuming cash flows arise evenly through each year, what is the payback period?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 3.1 years
Explanation
Cumulative inflows: Year 1 30,000; Year 2 70,000; Year 3 115,000. After 3 years, 120,000 - 115,000 = $5,000 is still to be recovered. This takes 5,000 / 50,000 = 0.1 of Year 4. Payback = 3.1 years. Dividing by average annual inflows (120,000 / 41,250 = 2.9) is only valid when inflows are constant.
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