Question

An investment project provides cash inflows of $675 per year for eight years.

a. What is the project payback period if the initial cost is $1,850? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.).

b. What is the project payback period if the initial cost is $3,600? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.).

c. What is the project payback period if the initial cost is $5,500? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a. 2.74 years

b. 5.3 years

c. NIL

Step-by-step explanation:

The formula to compute the payback period is shown below:

= Initial investment ÷ Net cash flow

For part a, the project payback period would be

= $1,850 ÷ $675

= 2.74 years

For part b, the project payback period would be

= $3,600 ÷ $675

= 5.33 years

For part c, the project payback period would be

= $5,500 ÷ $675

= NIL as the payback period 8.14 is exceeded then the expected life of the investment project i.e 8 years