The initial outlay or cost is $1,000,000 for a four-year project. The

The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?

A) About 2.50 years
B) About 2.67 years
C) About 3.67 years
D) About 4.50 years

ANSWER

Answer: B
Explanation: B) We can see that after two years, we will have paid back $800,000. Thus, we only need $200,000 in after-tax cash flows in the third year. Since we get $300,000 in the third year, the rule of thumb is to divide what is needed by the cash inflows we will get next period and add the results to the number of previous periods of cash inflows, e.g., ($200,000 divided by $300,000) + 2, which gives about 2.67. Thus, the payback period is about .