Question

Your project has expected cash inflows of $1.2 million in year 1, $2.4 million in year 2, and $4.6 million in year 3. The project pays for itself in 23 months. Which cash flow technique was used to determine this?

A: IRR
B: NPV
C: Discounted cash flow
D: Payback period

Answer 1

The cash flow technique used to determine the 23-month payback period is the Payback Period method. This method focuses on the time it takes for the cash inflows to cover the initial investment.

Step-by-step explanation:

The cash flow technique used to determine that a project pays for itself in 23 months is Payback Period. The Payback Period method simply calculates the time needed for the project to generate cash flows to recover the initial investment made.

Discounted Cash Flow (DCF) and Net Present Value (NPV) involve discounting the future cash flows to present value, using a specified discount rate, which was not indicated in the student's question. The Internal Rate of Return (IRR) is the rate at which the project breaks even in terms of NPV, but again, this requires a more complex calculation and is not directly concerned with the time to recover costs.

The cash flow technique used to determine the payback period in this scenario is D: Payback period.

The payback period is the length of time it takes for a project to recoup the initial investment or cost. In this case, the project pays for itself in 23 months.