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26 January, 19:08

You are considering a project with an initial cost of $7,500. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? A. 3.21 years B. 3.28 years C. 3.36 years D. 4.21 years E. 4.29 years

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  1. 26 January, 19:18
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    A. 3.21 years

    Explanation:

    In the payback, we analyze in how many years the invested amount is recovered. The computation is shown below:

    In year 0 = $7,500

    In year 1 = $1,100

    In year 2 = $1,640

    In year 3 = $3,800

    In year 4 = $4,500

    If we sum the first 3 year cash inflows than it would be $6,540

    Now we deduct the $6,540 from the $7,500, so the amount would be $960 as if we added the fourth year cash inflow so the total amount exceed to the initial investment. So, we deduct it

    And, the next year cash inflow is $4,500

    So, the payback period equal to

    = 3 years + $960 : $4,500

    = 3.21 years

    In 3.21 yeas, the invested amount is recovered.
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