Investment Payback Period Calculation

What is the payback period for an investment of $200,000 with the following cash inflows?

a. 3.5 years

b. 2.75 years

c. 2.25 years

Answer:

The payback period for the investment of $200,000 is 3.5 years, as mentioned in option a.

The payback period is a useful financial metric used to evaluate the time it takes for an investment to recover its initial cost. In this case, the investment of $200,000 generates annual cash inflows of $70,000 in the first two years, $80,000 in the third year, $50,000 in the fourth year, and $30,000 in the fifth year.

To calculate the payback period, we need to analyze when the cumulative net cash inflows equal or exceed the initial investment of $200,000. By examining the given data, we find that the cumulative net cash inflows reach $200,000 in Year 3 and surpass it in Year 4.

Using linear interpolation, we determine that half a year is needed for the cumulative net cash inflows to reach the initial investment in Year 3. Adding this to the whole number of years, the payback period is calculated as 3.5 years.

Therefore, the correct answer to the payback period calculation for the investment of $200,000 is 3.5 years. It indicates the time required for the cumulative net cash inflows to equal or exceed the initial investment amount.