---
title: "Payback period to recommend best of A, B, C"
subject: "Engineering Economics"
chapter: 4
key: "semester_6/engineering_economics:payback-recommend-abc-2a"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/payback-recommend-abc-2a
site: BCT Engineering
---

# Payback period to recommend best of A, B, C

Engineering Economics · Chapter 4: Comparative Analysis of Alternatives

- Asked in: 2065 Kartik, 4 marks
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/payback-recommend-abc-2a
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-4

## Question

Recommend the best using payback period for the following projects. (End of year cash flows in Rs. '000.)
| Project | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| A | -640 | 262 | 290 | 302 | 310 | 310 | 260 |
| B | -680 | -40 | 392 | 380 | 380 | 380 | 380 |
| C | -755 | 205 | 406 | 400 | 390 | 390 | 324 |

## Short answer

Cumulative cash flows give payback: A =2.29 years, B = 2.86, C = 2.36. Project A has the shoretest payback; recommend A.

## Answer

Payback period is the time needed for the cumulative net cash flow to become zero (simple payback, no discounting). The project with the shortest payback is preferred. (Figures in Rs '000.)

#### Cumulative cash flow
| Project | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| A | -640 | -378 | -88 | 214 | 524 | 834 | 1094 |
| B | -680 | -720 | -328 | 52 | 432 | 812 | 1192 |
| C | -755 | -550 | -144 | 256 | 646 | 1036 | 1360 |

#### Payback calculation
```text
A: cumulative = −88 at end of yr 2; yr 3 inflow = 302
   Payback = 2 + 88/302 = 2.29 years
B: cumulative = −720 (yr 1, because of the extra −40) and −328 at end of yr 2; yr 3 inflow = 380
   Payback = 2 + 328/380 = 2.86 years
C: cumulative = −144 at end of yr 2; yr 3 inflow = 400
   Payback = 2 + 144/400 = 2.36 years
```
| Project | Payback (years) |
|---|---|
| A | 2.29 |
| B | 2.86 |
| C | 2.36 |

**Answer: Recommend project A**, with the shortest payback of 2.29 years. Payback ignores cash flows after recovery and the time value of money (C earns the larger total returns and a higher PW), so the result should be confirmed with an NPW or ERR analysis before the final choice.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. What is simple payback period?
   A. Time for the cumulative net cash flow to reach zero, without discounting
   B. Time for PW to reach zero at MARR
   C. Total life of the project
   D. Year of the largest cash flow
   Answer: A. It is the time needed to recover the investment from cumulative undiscounted net flows. (Key point: Payback definition)

2. Cumulative flow of A is -88 at the end of year 2 and year 3 inflow is 302. What is payback?
   A. 3.00 years
   B. 2.88 years
   C. 2.71 years
   D. 2.29 years
   Answer: D. Payback = 2 + 88/302 = 2.29 years. (Key point: Payback for A)

3. Why should the payback result be confirmed with NPW or ERR?
   A. It uses too many decimals
   B. It ignores cash flows after recovery and time value of money
   C. It needs MARR
   D. It cannot handle negative flows
   Answer: B. C has larger later returns yet ranks behind A on payback, showing the method's blind spot. (Key point: Limitation of payback)

## Related in Engineering Economics

- [ERR to recommend best of A, B, C](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aerr-recommend-best-abc-e20) — Engineering Economics, chapter 4
- [Best of three mutually exclusive projects, 10-year study](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Amutually-exclusive-abc-study-10-years) — Engineering Economics, chapter 4
- [Best of P and Q for 5-year study period](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Abest-project-pq-study-5yr) — Engineering Economics, chapter 4
- [Payback, ERR and BCR for four projects](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Apayback-err-bcr-four-projects) — Engineering Economics, chapter 4
- [Best project for 4-year and 8-year service periods](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aselect-best-project-fw-4yr-irr) — Engineering Economics, chapter 4

## Related in other subjects

- [Best financing option; EBIT Rs 350,000](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Abest-option-two-options-ebit-350000) — Project Engineering, chapter 6