Training cost is $4,000 and a project required an initial investment of $30,000. If the project yields monthly savings of $2,000 beginning after 3 months, what is the payback period in months (before money costs and taxes)?

The payback period is the time required for the cumulative savings from a project to equal the total initial investment. The total initial investment includes all upfront costs, which are the project investment ($30,000) and the training cost ($4,000), totaling $34,000. The time needed to recover this amount with monthly savings of $2,000 is 17 months ($34,000 / $2,000). Since the savings do not begin until after the first 3 months, this initial delay must be added to the recovery time. Therefore, the total payback period is 3 months (delay) + 17 months (savings period), which equals 20 months.

A. 10: This is incorrect. It may result from improperly excluding the training cost or the initial 3-month delay from the calculation.
C. 27: This is incorrect. This value does not align with the standard payback period calculation using the provided investment, costs, and savings figures.
D. 33: This is incorrect. This value is significantly overstated and does not reflect the correct method for calculating the payback period.

1. Munro

R. A.

Ramu

G.

& Zrymiak

D. J. (2015). The Certified Six Sigma Green Belt Handbook (2nd ed.). ASQ Quality Press. In Chapter 1

Part V

"Financial Measures

" the payback period is defined as the time to recover the cost of an investment

which includes all initial outlays. The calculation method supports summing all initial costs before dividing by periodic returns.

2. Pyzdek

T.

& Keller

P. A. (2018). The Six Sigma Handbook (5th ed.). McGraw-Hill Education. Chapter 10

"Six Sigma Project Management

" discusses project selection criteria

including financial justification. The payback period calculation implicitly requires accounting for the total initial cash outflow and the timing of subsequent cash inflows.

3. Park

C. S. (2016). Fundamentals of Engineering Economics (4th ed.). Pearson. Chapter 5

"Evaluating a Single Project

" Section 5.3

describes the payback period. The principle is to find the point in time

n

at which the cumulative cash flow equals zero. This requires adding any initial period of no returns to the calculated recovery period.