Payback period: Initial investment $500,000; annual cash inflows $150,000. What is the payback period?

• A. 3.00 years
• B. 3.50 years
• C. 3.33 years
• D. 4.00 years

Answer: (C)

Payback period is the time it takes to recover the initial investment from the cash inflows. When the inflows are the same each year, you simply divide the initial outlay by the annual inflow. Here, 500,000 divided by 150,000 equals 3.333... years, which is 3 years and about 4 months. So the payback period is approximately 3.33 years. This reflects how long it takes to recover the upfront cost with the steady annual cash inflows. Keep in mind that this measure doesn’t account for the time value of money or cash flows received after payback.