Question

Guerilla Radio Broadcasting has a project available with the following cash flows :

Year | Cash Flow

0 −$14,600

1 6,000

2 7,300

3 5,300

4 5,100

What is the payback period?

A) 2.62

B) 1.75

C) 2.25

D) 3.00

E) 2.49

Answer 1

The Correct Answer is C) 2.25

Payback period can be defined as the time it takes for an investment or project to recover the initial investment made.

It is to be noted that on Year 3 we are getting extra amount $4000 and therefore Payback period cannot be 3. It will lie between Year 2 and 3 and as seen above at 2.25 years the initial investment made will be equal to the cash flows received.

Thus we can conclude that the Payback period is 2.25 years.