Question

Calculate the payback period for a project that has the following cash flows?

The required return is 12.0%.

Year Cash Flow

0 $ (12,000)

1 $ 1,000

2 $ 2,000

3 $ 3,000

4 $ 4,000

5 $ 5,000

6 $ 6,000

Group of answer choices

2.25 years

3.85 years

3.25 years

4.40 years

None of these are correct.

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(12000)	(12000)
1	1000	(11000)
2	2000	(9000)
3	3000	(6000)
4	4000	(2000)
5	5000	3000
6	6000	9000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4+(2000/5000)

=4.4 years