Question

Calculate the payback period for the following set of cash flows: Year Cash Flow -240,000 60,000 25,000 30,000 35,000 5 35,00
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Answer #1

Payback period is the number of years it takes to re-earn the invested amount.

Amount of investment = $240,000

Year 1 Cash = $60,000

Year 2 Cash = $25,000. Cumulative cash amount = $60,000 + $25,000 = $85,000

Year 3 Cash = $30,000. Cumulative cash amount = $85,000 + $30,000 = $115,000

Year 4 Cash = $35,000. Cumulative cash amount = $35,000 + $115,000 = $150,000

Year 5 Cash = $35,000. Cumulative cash amount = $150,000 + $35,000 = $185,000

Year 6 Cash = $40,000. Cumulative cash amount = $185,000 + $40,000 = $225,000

Year 7 Cash = $60,000. Cumulative cash amount = $225,000 + $60,000 = $285,000. This exceeds the amount required to complete payback, and hence year 7 would only be fraction.

Fraction of Year 7 for Payback = ($240,000 - $225,000)/$60,000 = 0.25 year

Hence, payback = 6 + 0.25 years = 6.25 years

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