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The payback period can become an important issue when a large scope project is developed over several years. Maureen has been assigned the responsibility of calculating the payback period for her project that is to be completede in 3 years. The internal rate of return(IRR) is 7% and the annual savings will be $800,000 per year. The total cost is $4,000,000 and the rate of return during this time period is 3%. What is the payback period of Maureen's project?

3 years
4 years
5 years
13.3 years

Correct Answer: 5 years

Explanation:

The payback period is how long it takes to recoup your investment. In this example, the cost was $4,000,000 and the savings was $800,000 per year. $4,000,000/$800,000 = 5. Therefore, Answer A, B and D are incorrect.

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