Question

The following are the cash flows of two projects:

Year	Project A			Project B
0	$	(230	)	$	(230	)
1		110			130
2		110			130
3		110			130
4		110

What is the payback period of each project?

Answer 1

PROJECT A
Year	0	1	2	3	4
Cash flow	-230	110	110	110	110
Amount recovered in 2 years	220
Amount recovered in 3rd year	110
Additional amount to be recovered	10
Additional amount recovered in	(10/110)*1
Additional amount recovered in	0.090909
The payback period is 2.0909 years.
PROJECT B
Year	0	1	2	3
Cash flow	-230	130	130	130
Amount recovered in 1 year	130
Amount recovered in 2nd year	130
Additional amount to be recovered	100
Additional amount recovered in	(100/130)*1
Additional amount recovered in	0.769231
The payback period is 1.7692 years.