CIMA BA2 · Chapter 12 · Question 1 of 13
A project costs $250,000 and is expected to generate cash inflows of $70,000 in year 1, $80,000 in year 2, $90,000 in year 3 and $60,000 in year 4. Cash flows arise evenly through each year. What is the payback period, to the nearest month?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 3 years 2 months
Explanation
Cumulative cash inflows: year 1 $70,000; year 2 $150,000; year 3 $240,000. A further $10,000 is needed in year 4, when $60,000 arises evenly: $10,000 / $60,000 x 12 months = 2 months. Payback = 3 years 2 months (3.17 years).
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