A bachelor’s degree costs $40,000 and is expected to raise starting salary by $15,000 per year. Without discounting, what is the simple payback period?

• A. 2.5 years
• B. 3.0 years
• C. 2.67 years
• D. 4.0 years

Answer: (C)

The simple payback period shows how long it takes to recover the initial cost from the annual cash inflows, ignoring the time value of money. Here, the cost is $40,000 and the annual cash inflow is $15,000. Divide 40,000 by 15,000 to get 2.666..., so about 2.67 years. Since there’s no discounting, the payback point is simply where the cumulative cash inflow equals the $40,000. The result of 2.67 years reflects exactly that calculation.