The payback period is the period in which the initial investment of the project is recovered.
The time period in which 90,000 is recovered is computed as follows:
The cumulative cash flows for five years is computed as follows:
= - 41,000 + 29,000 + 29,000 + 29,000 + 26,000
= 72,000
The cumulative cash flows for six years is computed as follows:
= - 41,000 + 29,000 + 29,000 + 29,000 + 26,000 + 42,000
= 114,000
It means that the investment of 90,000 is recovered between year 5 and year 6
So, the payback period is computed as follows:
= 5 years + Balance investment to be recovered / Year 6 cash inflow
= 5 years + (90,000 - 72,000) / 114,000
= 5.16 years Approximately
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