Question

What information does the payback period provide? Suppose you are evaluating a project with the expected...

What information does the payback period provide?

Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years.

Year

Cash Flow
Year 1 $275,000
Year 2 $450,000
Year 3 $425,000
Year 4 $500,000

If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is:

$326,261

$387,435

$428,217

$407,826

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Answer #1

Payback period is a duraion or an amount of time that a project takes to recover its Initial cost.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

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