ISACA Certified Information Systems Auditor (CISA) ExamDomain 3: Information Systems Acquisition, Development and ImplementationEasy
An IS auditor is evaluating the business case for a proposed investment in a new data warehousing solution. The project cost is estimated at $2 million, with expected annual benefits of $400,000. The project has a projected lifespan of 8 years. What is the simple payback period for this investment?
- A8 years
- B2 years
- C4 years
- D5 years
Show answer & explanationAnswer & explanation
Correct answer: D. 5 years
The simple payback period is calculated by dividing the initial investment cost by the annual cash inflows (benefits). In this case, Payback Period = $2,000,000 / $400,000 = 5 years.
Why the other options are wrong
- A. This is the project's lifespan, not its payback period.
- B. This would imply annual benefits of $1,000,000, which is incorrect.
- C. This would imply annual benefits of $500,000, which is incorrect.
Simple Payback Period
A capital budgeting technique that calculates the amount of time required for an investment to generate cash inflows sufficient to recover its initial cost.
- Does not consider the time value of money.
- Focuses on liquidity and risk.
- A shorter payback period is generally preferred.
Memory trick: Payback: Cost over Annual Gain, simple as that!