What is the investment's payback period?

Question

Firm A is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $300,000 in years 2 through 4, and $100,000 in year 5.

a) 5.55 years

b) 1.01 years

c) 2.67 years

d) 4.38 years

Explain your answer

Answer 1

You are look for the amount of time before the cash flows produced equal the amount invested.  That happens somewhere during the 3rd year.  Given your choices, the answer should be c. 2.67 years.  I did not bother to actually do the math.

Answer 2

C