Question

Given the following Cash flows: Initial investment at Time 0: 400,000, Net Cash inflows: Time 1: $20,000, Time 2: $70,000, Time 3: $110,000, Time 4:$200,000, Time 5: $400,000. What is the payback Period
5 Years
4 Years
3 Years
2

Answer 1

To calculate the payback period, we need to find the time it takes for the cumulative cash inflows to equal the initial investment.

Year 1: $20,000
Year 2: $20,000 + $70,000 = $90,000
Year 3: $90,000 + $110,000 = $200,000
Year 4: $200,000 + $200,000 = $400,000

The cumulative cash inflows equal the initial investment of $400,000 in Year 4. Therefore, the payback period is 4 Years.