Homework Answers
Payback period is the number of years it would take to re-earn the invested amount.
Invested amount = $16000
Year 1 CF = $3,000
Year 2 CF = $4,000. Cumulative CF = $3,000 + $4,000 = $7,000
Year 3 CF = $5,000. Cumulative CF = $7,000 + $5,000 = $12,000
Year 4 CF = $6,000. Cumulative CF = $12,000 + $6,000 = $18,000. This is higher than the required amount of $16,000. We only required $4,000 to complete payback and re-earn $16,000 in cumulative cash flows. Hence fraction of year 4 to complete payback = $4,000/$6,000 = 0.67 years
Payback = 3 + 0.67 years = 3.67 years
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