Suppose your firm is considering investing in a project that requires an initial investment of $200,000 at Year 0, and returns cash flows at the end of Years 1 to 3 of $50,000, $100,000 and $150,000 respectively. Further, assume your company’s cost of capital is 15%. In what year does payback occur for the project?

Q: Suppose your firm is considering investing in a project that requires an initial investment of $200,000 at Year 0, and returns cash flows at the end of Years 1 to 3 of $50,000, $100,000 and $150,000 respectively. Further, assume your company’s cost of capital is 15%. In what year does payback occur for the project?

or

Q: Let’s say your company is thinking of funding a project that would yield cash flows of $50,000, $100,000, and $150,000 at the end of Years 1 through 3, respectively, after requiring an initial expenditure of $200,000 in Year 0. Additionally, suppose that the cost of financing for your business is 15%. What year does the project pay for itself?

• Year 0
• Year 3
• Payback is never reached
• Year 2
• Year 1

Explanation: The cumulative cash flow of $200,000 is reached during Year 3, so the payback period occurs in Year 3.