ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
Delta Co is considering a project costing $120,000 with expected cash inflows of $40,000 in year 1, $50,000 in year 2, $60,000 in year 3 and $30,000 in year 4. Cash flows arise evenly through each year. What is the payback period?
- A2.5 years
- B2.83 yearsCorrect
- C2.0 years
- D3.0 years
Explanation
Cumulative inflows are $40,000 after year 1 and $90,000 after year 2. The remaining $30,000 is recovered in year 3 at $60,000 per year, which is 0.5 of the year, so payback is 2.5 years. Wait: $120,000 - $90,000 = $30,000, and 30/60 = 0.5, giving 2.5 years.
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