Question

What is the payback period on Popeye's purchase of a new pleasure boat for his tourist business? The expected cash flows appear below. (note: payback is in years; round to 2 decimals) Year 0 cash flow = -8,700,000 Year 1 cash flow = 4,400,000 Year 2 cash flow = 3,600,000 Year 3 cash flow = 4,000,000 Year 4 cash flow = 3,100,000 Year 5 cash flow = 4,100,000 Year 6 cash flow = 4,400,000

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(8,700,000)	(8,700,000)
1	4,400,000	(4,300,000)
2	3,600,000	(700,000)
3	4,000,000	3,300,000
4	3,100,000	6,400,000
5	4,100,000	10,500,000
6	4,400,000	14,900,000

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

=2+(700,000/4,000,000)

=2.18 years(Approx).