Question

The Zinger Company is considering an $11,000 investment that has the following net cash inflows: Year 1………..$2,000

Year 2………..$2,000

Year 3………..$5,000

Year 4………..$4,000

Year 5………..$4,000

The payback period for this investment is:

a. 3.0 years.

b. 3.5 years.

c. 4.0 years.

d. 4.5 years.

Answer 1

Payback period

It is the time required to recover the initial cost of an investment. It is the number of years it would take to get back the initial investment made for a project. Therefore, as a technique of capital budgeting, the payback period will be used to compare projects and derive the number of years it takes to get back the initial investment. The project with the least number of years usually is selected.

Foemula for computig Payback period with uneven cash flows

Cost of Investment	$11,000
Year	Cash flows	Cumulative cash inflows
1	$2,000	$2,000
2	$2,000	$4,000
3	$5,000	$9,000
4	$4,000	$13,000
5	$4,000	$17,000
Payback period =	=3+(2000/4000)
3.5 years

Answer - Option b - 3.5 years is the correct answer