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What is the payback period for a​ $20,000 project that is expected to return​ $6,000 for the first two years and​ $3,000 for years 3 through​ 5?

a. 5
b. 3​ 1/2
c. 4​ 1/2
d. 4​ 2/3?

User Kobius
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1 Answer

5 votes
Let's start by adding year one and two together!
In year one and two, we expect to get 6,000 dollars right? So...
6,000
+6,000
------------------
12,000
That's not enough to cover your debt! So let's add year three. In year three you expect to get $3,000. So...
12,000
+3,000
-----------------
15,000.
Still not enough! So let's add year four. You are expected to make $3,000. So...
15,000
+ 3,000
----------------
18,000.
Still not enough... Year five, you expect to make $3,000. So...
18,000
+ 3,000
-------------
21,000
Whoa, that's too much! How much is it to much by? 1/3rd of a year.
So your answer is D. 4 2/3.
Hope this helps! Have a happy holiday!


User Mentics
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7.0k points