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ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

A project requires an initial outlay of $60,000 now and generates net cash inflows of $24,000 at the end of each of years 1 to 3, then $12,000 at the end of year 4. What is the payback period?

Payback is 2.5 years. Cumulative inflows reach $48,000 after two years, leaving $12,000 of the $60,000 outlay. Year 3 produces $24,000 evenly, so half of that year is needed to recover the balance, giving two and a half years.

  1. A2.5 yearsCorrect
  2. B2.75 years
  3. C2.0 years
  4. D3.0 years

Explanation

Cumulative cash flow: year 1 $24,000, year 2 $48,000, year 3 $72,000. After 2 years $12,000 remains to be recovered, and year 3 generates $24,000 evenly, so 12/24 = 0.5. Payback is 2.5 years. Using 3.0 years wrongly assumes recovery only at the end of year 3.

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