Question

A project requires an initial purchase of a machine for $10,000 and working capital of 5000$.The project will generate revenue of $2,500 per year. What is the payback of the project?

A. 4 years

B 6 years

C 25%

D 2 years

Answer 1

B.6 years

Payback period of a project refers to that period in which company can recover its initial investment from the cash flows generated from the project. i.e., if a company can recover its initial investment in 5 years then the payback period of that project will be 5 years

In this case project requires purchase of a machinery costing $10000 and working capital of$5000

Therefore initial investment of the project will be 10000+5000=15000

Working capital is also a part of initial investment,as it affects the cash flow of the company , it has to be included in initial investment of the project

Company generates$2500 every year .i.e., cash inflow

Therefore payback period will be =initial investment/cash inflow

=15000/2500

=6 years