Question

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f.   What is the regular payback period for these two projects?
Project A
	Time period	0	1	2	3	4	5	6	7
	Cash flow	(375)	(300)	(200)	(100)	600	$600	$926	($200)
	Cumulative cash flow
Intermediate calculation for payback		—
Payback using intermediate calculations
Project B
	Time period	0	1	2	3	4	5	6	7
	Cash flow
	Cumulative cash flow
Intermediate calculation for payback
Payback using intermediate calculations
	Payback using PERCENTRANK		Ok because cash flows follow normal pattern.

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L
2
3		Calculation of Payback period for project A:
4		Payback period is the period when investment amount is recovered.
5		Year	0	1	2	3	4	5	6	7
6		Free Cash Flow	($375)	($300)	($200)	($100)	$600	$600	$926	($200)
7		Cumulative cash flow	($375)	($675)	($875)	($975)	($375)	$225	$1,151	$951	=J7+K6
8
9		Payback period is when cumulative free cash flow becomes zero.
10		It can be seen from above that cumulative cash flow becomes zero between year 4 and year 5.
11
12		To estimate the exact payback period cumulative free cash flow can be proprated over the years as follows:
13		Payback period	4.63	=H5+(0-H7)/(I7-H7)
14
15		Hence Payback period for project A is	4.63	Years
16
17		The cash flows for prject B is required to calculate the payback period of project B.
18