Skip to content

CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation

A project requires an initial outlay of $60,000 and is expected to generate cash inflows of $20,000 in Year 1, $25,000 in Year 2, $30,000 in Year 3 and $10,000 in Year 4, all received evenly through each year. The payback period is closest to:

The payback period is 2.5 years. Cumulative cash flows reach 45,000 after two years, leaving 15,000 unrecovered. Year 3 produces 30,000 evenly, so half of that year is needed, giving 2 plus 0.5 equals 2.5 years.

  1. A2.5 years
  2. B2.7 yearsCorrect
  3. C3.2 years

Explanation

Cumulative inflows after Year 2 are 45,000, leaving 15,000 to recover. Year 3 inflow is 30,000, so the fraction is 15,000/30,000 = 0.5, giving 2.5 years. Recomputing: 20,000 + 25,000 = 45,000; 60,000 − 45,000 = 15,000; 15,000/30,000 = 0.5. The key is therefore 2.5 years.

Did you get it right without looking?

One question tells you little. A timed set on Capital Investments and Capital Allocation shows your real accuracy, how long you take and where you lose marks.

Practise Capital Investments and Capital AllocationFree diagnostic mock

More Capital Investments and Capital Allocation questions