What is the payback period?

Question

What is the payback period for a project with an initial investment of $150,000 that provides an annual cash inflow of $20,000 for the first three years and $30,000 per year for years four through eight?

a) 5 years

b) 6 years

c) 7 years

d) 8 years

Answer 1

b)

Payback = number of years for cash flows to equal capital investment

150,000 = (20,000+20,000+20,000 + 30,000 + 30,000 + 30,000) = 6 years