Payback Period of Investment Made

A

The payback period is a financial metric that measures the time it takes for an investment to generate enough cash flows to recover the initial investment cost. In other words, it's the time it takes for the investor to "break even" on the investment.

Out of the given options, the correct answer to this question is option A, Future cash flows.

Future cash flows refer to the estimated cash flows that an investment is expected to generate in the future. To calculate the payback period, we need to determine the point in time when the accumulated future cash flows equal the initial investment cost. This point in time represents the payback period.

To calculate the payback period using future cash flows, you need to follow these steps:

1. Determine the initial investment cost.
2. Estimate the future cash flows for each period of the investment's life.
3. Subtract each period's cash flow from the initial investment cost, and accumulate the differences until the total equals zero or becomes positive.
4. The point in time when the total accumulated cash flows equal the initial investment cost is the payback period.

The other options are not relevant for calculating the payback period.

• Present cash flows refer to the discounted cash flows of the investment, which are adjusted for the time value of money. Present cash flows are used to calculate metrics such as net present value (NPV) and internal rate of return (IRR).

• Operating cash flows refer to the cash flows generated by the ongoing operations of a business, and are used to calculate metrics such as free cash flow and cash flow from operations.

• Free cash flows refer to the cash flows generated by a business after deducting capital expenditures (i.e., investments in fixed assets). Free cash flows are used to assess a company's ability to generate cash for distribution to investors.

Therefore, none of the other options directly give the payback period of an investment.