In the payback example, if upfront cost is $8,000 and annual net savings are $2,000, what is the payback period?

• A. 3 years
• B. 4 years
• C. 5 years
• D. 6 years

Answer: (B)

The main idea is how long it takes to recover the initial investment from the annual net savings. You recover 2,000 each year, so the time to break even is the upfront cost divided by the annual savings: 8,000 ÷ 2,000 = 4 years. After four years, the total savings sum to 8,000, matching the upfront cost, so the investment is recovered.

Note that this simple payback method ignores the time value of money and any cash flows beyond the payback point.