Question

Cash Flow	E	F
Cost	44000	105000
Cash flow year 1	9778	42000
Cash flow year 2	9778	31500
Cash flow year 3	9778	21000
Cash flow year 4	9778	10500
Cash flow year 5	9778	0
Cash flow year 6	9778	0

Payback period. What are the payback periods of projects E and F in the following​ table: Assume all the cash flow is evenly spread throughout the year. If the cutoff period is 3 ​years, which​project(s) do you​ accept?

Answer 1

Computation of the Pay back period for the project E

Initial investmennt is 44000.

Year	Cash flow	Cummulative cash flow
1	9778	9778
2	9778	19556
3	9778	29334
4	9778	39112
5	9778	48890
6	9778	58668

In the 4 th year , Cost is recovered upto $ 39112

Remaining Cost to be recovered = $ 44000-$ 39112

= $ 4888

Remaining period = $ 4888/$ 9778 = 0.49989 or 0.5 ( Approximately)

Hence pay back period for Project E is 4.5 Years

Computation of the Pay back period for the project F

Initial investmennt is 105000.

Year	Cash flow	Cummulative cash flow
1	42000	42000
2	31500	73500
3	21000	94500
4	10500	105000

From the table we can say that payback period is 4 years ( Because the entire cost is recovered)

Hence pay back period for project F is 4 years.

Decision making: Since the pay back period of both the projects exceeds our cut off period ( i.e 3 years) , we cannot accept any project.