Question

An investment project provides cash inflows of $600 per year for eight years.

a. What is the project payback period if the initial cost is $1,625? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
b. What is the project payback period if the initial cost is $3,225? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
c. What is the project payback period if the initial cost is $5,100? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

(i) 2.71 years

(ii) 5.38 years

(iii) Never or 0

Step-by-step explanation:

1. Payback period:

= Initial cost ÷ cash inflows

= 1625 ÷ 600

= 2.71 years(Approx).

2. Payback period:

= Initial cost ÷ cash inflows

= 3225 ÷ 600

= 5.38 years(Approx).

3. The payback period for an initial cost of $5,100 is a little trickier.

Notice that the total cash inflows after eight years will be:

= 8 × $600

= $4,800

Payback period

= Initial cost ÷ cash inflows

= 5100 ÷ 600

= 8.5

This answer does not make sense since the cash flows stop after eight years, so again, we must conclude the payback period is never.