ExpertEasy2 marksMultiple Choice
ACCA · Question 26 · Budgeting
A project requires an initial investment of $80,000. It generates the following cash inflows:
Year 1: $30,000
Year 2: $40,000
Year 3: $30,000
Assuming cash flows occur evenly throughout the year, what is the payback period?
A project requires an initial investment of $80,000. It generates the following cash inflows:
Year 1: $30,000
Year 2: $40,000
Year 3: $30,000
Assuming cash flows occur evenly throughout the year, what is the payback period?
Answer options:
A.
2.00 years
B.
2.33 years
C.
2.50 years
D.
3.00 years
How to approach this question
Calculate cumulative cash flows. Find the year where the initial investment is crossed. Divide the remaining amount needed by the cash flow of that specific year to get the decimal.
Full Answer
B.2.33 years✓ Correct
End of Year 1: $30,000 recovered ($50,000 left).
End of Year 2: $70,000 recovered ($10,000 left).
During Year 3, we need $10,000 out of the $30,000 total for the year.
$10,000 / $30,000 = 0.33 years.
Total payback = 2 + 0.33 = 2.33 years.
Common mistakes
Averaging the cash flows instead of using cumulative cash flows.
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