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A project that costs $24,000 today will generate cash flows of $7,900 per year for seven years. What is the project's payback period?

Question

A project that costs 24,000todaywillgeneratecashflowsof24,000** today will generate cash flows of **7,900 per year for seven years. What is the project's payback period?

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Solution

The payback period is a financial metric that is widely used to measure the length of time it takes to recover the cost of an investment. Simply put, the payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment.

Here's how to calculate the payback period for this project:

  1. Identify the initial cost of the project. In this case, the initial cost is $24,000.

  2. Identify the annual cash inflow from the project. In this case, it's $7,900 per year.

  3. Divide the initial cost by the annual cash inflow.

So, 24,000/24,000 / 7,900 = 3.04 years.

Therefore, the payback period for this project is approximately 3.04 years. This means it will take just over 3 years to recover the initial investment of 24,000,assumingthecashinflowis24,000, assuming the cash inflow is 7,900 per year.

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