Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000

Will it accept the project if it's payback period is 31 months?
A) Yes, because it pays back in 25 months.
B) Yes, because it pays back in 28 months.
C) No, because it pays back in over 31 months.
D) No, because it pays back in over 35 months.

Answer: B
Explanation: B) We can see that after two years, we will have paid back $90,000. Thus, we only need $10,000 in after-tax cash flows in the third year. Since we get $30,000 in the third year, the rule of thumb is to divide what is needed by the cash inflows we will get next period and add the result to the number of previous periods of cash inflows, e.g., ($10,000 divided by $30,000) + 2. Doing this gives 2-1/3 years. The payback period in months is 2-1/3 * 12 = 28 months. Thus, Acme can accept the project as it pays back within 31 months.