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Answer
Payback refers to the time taken by the project to recover its
initial investment
We calculate cumulative cash flows for calculating the payback
period
Cash flows are discounted at 10% .
| Year | Cash flows | Discounted cash flows | Cumulative cash flows |
| 0 | -120000 | -120000 | -120000 |
| 1 | 0 | 0 | 0 |
| 2 | 35000 | 28925.62 | -91074.4 |
| 3 | 55000 | 41322.31 | -49752.1 |
| 4 | 75000 | 51226.01 | 1473.943 |
As we see the cumulative cash flows become positive between the end
of 3rd and 4 th year .
D.P.B = 3 + (49752/51226.01)
= 3+ .97
= 3.97 years
The discounted payback period is greater than 3 years. The
PROJECT SHOULD NOT BE ACCEPTED .
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