Investment Paybeack Period

QUESTION

Your firm is considering an investment that will cost $750,000 today. The investmentwill produce cash flows of $250,000 in year 1, $300,000 in years 2 through 4, and$100,000 in year 5. What is the investments payback period?- 5.55 years- 1.01 years- 2.67 years- 4.38 years
investment payback period = The period by which the investment is fully recovered. so,we have to find by which year $ 750,000 is fully recovered. cash inflow by year 1 end = $250,000 cash inflow by year 2 end = $ (250,000 300,000) = $550,000 cash inflow by year 3 end = $ (550,000 300,000) = $ 850,000 Hence payback period lies in between year 2 &3 During year 3, we have to recover

$(750,000 550,000) = $ 200,000 In the entire year 3 cash flow is $ 300,000 Considering uniform cashflow, part of year 3 required = $200,000/$300,000 = 0.67 year. So, payback period is = 2 0.67 = 2.67 years. HENCE, OPTION 3, I.E. 2.67 YEARS IS THE ANSWER.

ANSWER:

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