A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's payback period equals ________.
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A. B. C. D.D
The cash flows of the project starting at the end of year 1 are:
-700, -900, +1,200, +1,600, +2,300
The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash flow in the payback year) The net account balance goes positive in the 4th year. At the beginning of the 4th year, the outstanding balance equals 650+700+900-1,200 = $1,050. Therefore, payback period = 3 + 1,050/1,600 = 3.66 years.