A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s payback period?

Fin 515 midterm exam – summer 2015

The project’s payback period is 4.75 years ($95,000 / $20,000 = 4.75). Payback is the time it takes for a company to recover their initial investment. The company will be able to recover their $95,000 initial expenditure after receiving an average of $20,000 per year in cash inflows over the next 4.75 years.

Other than the payback time, other metrics like net present value (NPV), can be used to assess projects. It takes into consideration both the money value and the opportunity costs of investing in one venture or another. Businesses may consider alternative options if the expected returns for an investment do not meet their needs.

Companies can gain a better understanding of the payback period factors to help them make informed investments. This will allow them to take more accurate decisions on how they plan to recover funds and maximize profits in a shorter time frame.

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