Question

A company is considering a project that would require a $4,500,000 intial cash outflow at the beginning. The project is expected to generate cash inflows in the amount of $1,250,000 at the end of each year of the project. The company requires a 12.75% return on investment. How many years is the payback period for this project? Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas in your response. For example, an answer of 1,000.50 should be entered as 1000.50 .

Answer 1

The payback period for the project is 3.6 years, calculated by dividing the initial investment of $4,500,000 by the expected annual cash inflows of $1,250,000.

Step-by-step explanation:

To calculate the payback period for the described project, we must determine how many years it would take for the cash inflows to cover the initial investment of $4,500,000. With an annual cash inflow of $1,250,000, we can simply divide the initial outflow by the annual inflow:

Payback Period = Initial Investment / Annual Cash Inflow

= $4,500,000 / $1,250,000

= 3.6 years

Therefore, it would take 3.6 years for the company to recover its initial investment through the annual cash inflows. Given that the company requires a 12.75% return on investment, this payback period must be considered alongside other investment appraisal techniques to determine whether the project meets the company's return criteria.