If the initial uncovered cost is $200, the total cash flow in the recovery year is $400, and the number of years before full recovery is 3, what is the payback period?

Explanation

The payback period is calculated by adding the number of years prior to full recovery (3 years) to the fraction of the recovery year needed to cover the remaining uncovered cost. Since the uncovered cost is $200 and the cash flow during the recovery year is $400, half of the year (0.5) is required to recover the remaining amount. Therefore, the total payback period is 3 + 0.5 = 5 years.