Which of the following best represents the cash payback formula? A : Cost of Capital Investment : Net Income B : Cost of Capital Investment : Net Annual Cash Flow C : Average Investment : Net Annual Cash Flow D : Average Investment : Net Income

B : Cost of Capital Investment : Net Annual Cash Flow

Explanation:

The amount of time a project requires to repay its initial investment is known as the payback period. It is the period a project takes to break-even.

The payback period is a capital budgeting technique used by managers to evaluate the suitability of a proposed project. Projects with a shorter period are preferred as they expose the initial investment for a short time.

In calculating the payback period, one has to consider the initial investments and returns expected per year. Dividing the initial investment by the projected annual net income gives the payback period. The formula provides time in the form of years and months.