Homework Answers
Since, payback does not take into account time value of money, we need to calculate yearly cash flows. The year post which the cumulative cash flows turns positive is the payback.
Yearly cash flows are as follows:
| Year | Cash flow | Cumulative cash flow |
|---|---|---|
| Year 0 | -$2350 | -$2350 |
| Year 1 | $750 | -$1600 |
| Year 2 | $750 | -$850 |
| Year 3 | $750 | -$100 |
| Year 4 | $750 | $650 |
| Year 5 | $750 | $1400 |
| Year 6 | $2063 | $3463 |
Since, cumulative cash flows turns positive right after year 3, payback period is 3 years.
Final answer: 3
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