Question

What is the payback period of an irrigation system that costs $25,000 and has returns of: $12,500 in year one, $10,000 in year two, $7,500 in year three, and $5,000 in year four? All cash outflows occur at the end of the year.

Agriculture Finance

Answer 1

Year	Cash Flows	Cumulative Cash Flows	Investment still to be covered
0	-$25,000		-$25,000
1	$12,500	$12,500	-$12,500
2	$10,000	$22,500	-$2,500
3	$7,500	$30,000	$5,000
4	$5,000	$35,000	$10,000

Payback period = Year before investment fully covered + [Investment still to be covered / Cash flows during the period)

Payback period = Year 2 + [$2,500 / $7,500]

Payback period = 2.333 years