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)