Question

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is ________.

Answer 1

3 1/3 years

Step-by-step explanation:

Payback period is the time required for the inflows from a project to be equal to the initial outflow for the project. It is a key consideration in capital budgeting. It is usually assumed that the outlay or initial outflow is made in year 0 and the first inflow comes in after a year.

Year Cash outflow Cash inflow Balance

0 ($50,000) - ($50,000)

1 - $15,000 ($35,000)

2 - $15,000 ($20,000)

3 - $15,000 ($5,000)

4 - $15,000 $10,000

5 - $15,000 $25,000

Hence the payback period

= 3 years and 5000/15000 * 12 months

= 3 years 4 months

= 3 1/3 years