Question

A project has the following cash flows: Project Cash Flow -$3,000 1,000 1,000 1,234.07 1,000 Its cost of capital is 10 percent. What is the project's payback period?

Answer 1

Solution :

The project's Payback period is = 2.81 years

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

09.02.2020 - Microsoft Excel XES HOME А в INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW F H I J K Statement showing calculation of Payback period of the project Sl.No. Particulars Year Project Cash Flows Cumulative cash flows 1 Cash Inflow Year 1 1 $ 1,000.00 $ 1,000.00 Cash Inflow Year 2 1,000.00 $ 2,000.00 3 Cash Inflow Year 3 1,234.07 $ 3,234.07 4 Cash Inflow Year 4 1,000.00 $ 4,234.07 Payback Period: The Payback period lies between the year 2 & 3 as the Initial Investment of $3,000 is earned during the year 3 Hence Payback period = 2 years +[($ 3,000 - $1,000) / $ 1,234.07] = 2 + [ 1,000/1,234.07] = 2 +0.8103; = 2.8103 years; = 2.81 years ( when rounded off to two decimal places)