Question

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

Year	0	1	2	3
Cash flows	-$475	$150	$200	$300

a. 2.88 years

b. 1.96 years

c. 2.42 years

d. 2.47 years

e. 2.85 years

Answer 1

Payback period represents the time period in which the initial investment in a project is recovered.

Payback period of is computed as follows:

The cumulative cash inflow of year 1 and 2 is computed as follows:

= $ 150 + $ 200

= $ 350

The cumulative cash inflow of year 1, 2 and 3 is computed as follows:

= $ 150 + $ 200 + $ 300

= $ 650

It means that the initial investment of $ 475 is recovered between year 2 and year 3 and hence the payback period lies between year 2 and year 3 and is computed as follows:

= 2 years + Remaining investment to be recovered / Year 3 cash inflow

= 2 years + ( $ 475 - $ 350) / $ 300

= 2.42 years Approximately

So, the correct answer is option c.

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