Free PMI Project Management Professional (PMP) Practice Question

The correct answer is Project B. To calculate the payback period, we divide the initial investment by the annual cash flow:

Project A: $500,000 / $150,000 = 3.33 years Project B: $400,000 / $125,000 = 3.20 years

Project B has a shorter payback period of 3.20 years compared to Project A's 3.33 years. This means that Project B will recover its initial investment faster than Project A. However, it's important to note that while the payback period is a useful metric for assessing liquidity and risk, it doesn't account for the time value of money or cash flows beyond the payback period. Other financial metrics like Net Present Value (NPV) or Internal Rate of Return (IRR) should also be considered for a comprehensive project evaluation.