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The payback period of an investment is

  • A.The time to reach rated capacity
  • B.Time for cumulative inflow to equal the outlay
  • C.The plant's design life
  • D.The depreciation period used for tax

Answer: B

Correct answer: Time for cumulative inflow to equal the outlay

The payback period is how long the investment takes to return its own cost:

\[ \text{Payback} = \frac{\text{Initial outlay}}{\text{Annual net cash inflow}} \]

It is simple and widely used as a first screen, but it ignores everything after the payback point and takes no account of the time value of money.

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