Question

Suzanne's Cleaners is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5
Cash flows -$1,100 $300 $310 $320 $330 $340
A.2.31 years
B.2.56 years
C. 2.85 years
D. 3.16 years
E. 3.52 years

Answer 1

The payback period is E. 3.52 years

Step-by-step explanation:

The payback period is the time taken for an investments cash inflows to cover the initial outlay or initial cost of the project. The payback period tells how much time the project will require to cover its initial cost.

The initial cost of the project is $1100

By the end of Year 3, the project will recover = 300 + 310 + 320 = 930

The remaining amount to recover initial cost = 1100 - 930 = 170

Assuming that the cash flows occur evenly though out the years, the payback period will be = 3 + (170 / 330) * 10 = 3.515 rounded off 3.52 years