If an investment requires $150,000 and annual cash flows are $30,000, what is the Payback Period?

• A. 4.5 years
• B. 5 years
• C. 6 years
• D. 7 years

Answer: (B)

Payback period tells you how many years it takes to recover the initial investment from cash inflows. With an upfront cost of 150,000 and constant annual cash inflows of 30,000, divide the cost by the annual inflow: 150,000 ÷ 30,000 = 5 years. So the investment is recovered after five years. This approach assumes cash flows are received evenly each year and doesn’t account for the time value of money or cash flows after payback. If cash inflows varied, you’d add them year by year until the total reaches 150,000 to find the exact payback year. The other options would correspond to different annual cash flows (e.g., a 4.5-year payback would require about 33,333 per year, and a 6-year payback would require about 25,000 per year).