ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
A project requires an initial outlay of $120,000 and generates net cash inflows of $50,000 in each of years 1 to 4, received evenly through each year. What is the payback period?
Payback is 2.4 years. After two years the project has recovered $100,000 of the $120,000 outlay, and the remaining $20,000 is recovered in 0.4 of the third year, since inflows are $50,000 per year received evenly.
- A2.0 years
- B2.4 yearsCorrect
- C2.8 years
- D3.0 years
Explanation
Cumulative inflows after 2 years are $100,000, leaving $20,000 to recover. In year 3, $20,000 / $50,000 = 0.4 years. Payback is 2.4 years. 2.0 ignores the remaining balance.
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