Question

The Beans Corporation is considering investing in a project with an initial cash investment of $180,000 that provides an annual cash inflow of $40,000 in Years 1-3, then $25,000 per year in Years 4-5, and $50,000 per year in Years 6-8. The PAYBACK PERIOD for this project is:

Select one:

a. 5.8 years

b. 5.6 years

c. 5.2 years

d. 5.4 years

Answer 1

c. 5.2 years

Payback period is the time within which cost of project is recovered back.
Year	Cash Flow	Cumulative cash flow
0	-1,80,000	-1,80,000
1	40,000	-1,40,000
2	40,000	-1,00,000
3	40,000	-60,000
4	25,000	-35,000
5	25,000	-10,000
6	50,000	40,000
7	50,000	90,000
8	50,000	1,40,000
Payback period	=	5+(10000/50000)
	=	5.2 Years
In 5.2 years, Investment of $ 180,000 will be recovered back.