Question

QUESTION 1 Given the following cash flows for project A: Co = -1,500, C1 = 500, C2 = 500, and C3 = 1,500, calculate the payback period. 2.5 years 3.0 years 1.8 years 2.3 years

Answer 1

Year	Cash Flows	Cumulative cash flows	Investment still to be covered
0	-$1,500	-	($1,500)
1	$500	$500	($1,000)
2	$500	$1,000	($500)
3	$1,500	$2,500	$1,000

So, Investment was completely covered in the 3rd year

Payback period = Year before investment covered + [Investment still to be covered/Cash flows @3rd yr]

Payback period = 2 year + [$500 / $1,500]

Payback period = 2 year + 0.33 year

Payback period = 2.33 year

or Payback period = 2.3 year (rounded off to '1' decimal)

Option 'D' is correct