ITPEC FE Morning October 2018 Question 79
ITPEC FE Morning October 2018 — Question 79 of 80
Payback Period — calculating how long it takes to recover an initial investment from annual cash flows.
The initial investment is 100 million dollars. Cash flows arrive annually:
- •End of Year 1: cumulative = 20
- •End of Year 2: cumulative = 50
- •End of Year 3: cumulative = 90
- •End of Year 4: cumulative = 140
By Year 3, 90 out of 100 is recovered; the remaining 10 is covered partway through Year 4 (which brings in 50).
Payback period = 3 + (100 − 90) / 50 = 3 + 0.2 = 3.2 years → Answer: b)
Why not the others:
- a) 3.0 — Would require exactly 100 recovered by end of Year 3, but only 90 is recovered
- c) 3.5 — Would imply 25 remaining at Year 3 (half of Year 4's 50), but only 10 remains
- d) 4.0 — Would mean the investment isn't recovered until the very end of Year 4, but it's recovered earlier
Key rule: Payback period = last full year before recovery + (remaining amount / next year's cash flow). The (100) in parentheses is accounting notation for a negative number (the outflow).
AI-generated — may contain errors
The original exam layout is preserved in the image so diagrams, formulas, tables, and code remain accurate.
This question comes from an official ITPEC past paper. ITPEC Practice is an independent study tool and is not affiliated with ITPEC. See the official FE past-paper collection or Report an issue.