Question

Kenny, Inc. is analying a project that will have an upfront cost of $26,200. This project is expected to deliver positive cash flows over the next five years of $6,300, $8,400, $8,950, $7,850, and $7,100, respectively. Calculate the payback period for this project. Multiple Choice O 3.69 years 372 years O 353 years O 3 years 332 years

Answer 1

Calculation of payback period:

Sum of Cash flows till third year

$6300+$8400+$8950

= $ 23650

Given, upfront cost $ 26200

Difference between the sum of cash flows till third year and upfront cost is

= $ 2550

For $23650 , it will take 3 years.

For $2550 =>

$ 2550×3/23650

= $ 7650/23650

= 0.32 years ( rounded off )

Payback period =>

3 years(for the first 3 year's cash flows)

+0.32 years (for remaining part of cash flows)

=> 3.32 years