Maureen is calculating the payback period for a project that costs $4,000,000 and is expected to generate uniform savings of $800,000 per year. Ignoring interest rate details, what is the payback period for this project?

Introduction / Context:
The payback period is a basic financial metric used in project selection and evaluation. It tells you how long it will take for cumulative cash inflows or savings to recover the initial investment. In many PMP style exam questions, the payback period is calculated using simple, undiscounted cash flows, even if other financial information such as interest rates or internal rate of return (IRR) is provided as extra data. The focus is on quickly determining the number of years required to pay back the initial cost from expected annual benefits.

Given Data / Assumptions:

• The initial project cost is $4,000,000.
• The project will generate annual savings of $800,000, assumed to be uniform each year.
• The project is expected to run for several years, but the question is only about the time to recover the initial investment.
• The IRR and other interest rate figures are given but can be ignored for a simple payback calculation.

Concept / Approach:
The simple payback period (undiscounted) is calculated by dividing the initial investment by the annual cash inflow or savings. The formula is straightforward: payback period = initial cost / annual benefit. In this case, you divide $4,000,000 by $800,000 per year. The result tells you how many full years of savings are needed before the original investment has been entirely recovered, without considering the time value of money. This method is quick and easy but does not account for cash flows after the payback point or the impact of discount rates.

Step-by-Step Solution:
Step 1: Write the simple payback period formula: payback period = initial investment / annual savings. Step 2: Substitute the given values: initial investment = 4,000,000 and annual savings = 800,000. Step 3: Compute 4,000,000 / 800,000 = 5. Step 4: Interpret the result: it will take 5 years of savings at $800,000 per year to recover the full $4,000,000 investment. Step 5: Select option C, which states that the payback period is 5 years.

Verification / Alternative check:
You can also think of the payback period as counting annual savings until the total matches the initial cost. After 1 year, cumulative savings are $800,000; after 2 years, $1,600,000; after 3 years, $2,400,000; after 4 years, $3,200,000; after 5 years, $4,000,000. This cumulative addition confirms that the break even point is reached at the end of the fifth year. The extra financial details such as IRR do not change the simple arithmetic of this undiscounted payback calculation.

Why Other Options Are Wrong:
Option A (3 years) and option B (4 years) underestimate the time required; at 3 years you only have $2,400,000 and at 4 years you have $3,200,000, both less than the $4,000,000 investment. Option D (13.3 years) greatly overestimates the payback time and does not align with the simple division result. Option E incorrectly claims that the payback period cannot be calculated without using IRR; in fact, simple payback is defined without discounting and is straightforward to compute.

Common Pitfalls:
A common pitfall is mixing payback period with discounted payback or IRR calculations. Payback period in many exam questions is the simple, undiscounted version, so you should not overcomplicate the calculation with interest rates unless the question specifically asks for a discounted payback. Another mistake is forgetting to use the correct units, such as accidentally dividing by monthly savings when the question gives annual amounts. Here, both the cost and the savings are annualized in dollars, making the calculation simple.

Final Answer:
The payback period for Maureen's project is 5 years.