Question

. GBN Inc. is considering a project that has the following cash flow data. What is the project's payback period?

Year |
0 |
1 |
2 |
3 |

Cash flows |
-$450 |
$200 |
$100 |
$200 |

Select one:

a. 2.5 years

b. 1.75 year

c. 2.75 years

d. 2 years

Answer #1

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2 + ( 150 /200)

= 2.75 Years

Hence the correct answer is **c. 2.75 years**

Note :

Year | Investment | Cash Inflow | Net Cash Flow | |

0 | -450 | - | -450 | (Investment + Cash Inflow) |

1 | - | 200 | -250 | (Net Cash Flow + Cash Inflow) |

2 | - | 100 | -150 | (Net Cash Flow + Cash Inflow) |

3 | - | 200 | 50 | (Net Cash Flow + Cash Inflow) |

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