ICAEW BIP · Chapter 13 · Question 1 of 9
A project needs an initial investment of £180,000. Net cash inflows are expected to be: year 1 £45,000, year 2 £55,000, year 3 £70,000, year 4 £80,000. Cash flows arise evenly over each year. What is the payback period?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 3.125 years
Explanation
Cumulative cash flows: year 1 £45,000, year 2 £100,000, year 3 £170,000. After 3 years, £10,000 is still to be recovered from year 4's inflow of £80,000. Payback = 3 + 10,000/80,000 = 3.125 years (about 3 years and 1.5 months).
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