Question

A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost? a. $180 b. $200 c. $140 d. $120 e. $150

Answer 1

Initial Cost = $180

Step-by-step explanation:

Payback period estimates the time an investment projects resulting cash flows take to recover the initial amount o=invested in the project. A traditional payback period doesnot take present value into account and just focuses on the nominal recovery of the initial investment.

If a capital budgeting project provides inflows of $50 per year and the payback period is 3.6 years, the initial investment is:

3.6 = 50 + 50 + 50 + x

Where x = 0.6 of 50

and x = 0.6 * 50 = 30

Initial cost = 50 + 50 + 50 + 30 = $180