Question

Payback period Given the cash Bow of two projects A and B and using the payback period decision model, which project(s) do you accept and which project(s) do you reject if you have a three-year cutoff period for recapturing the initial cash outflow? For payback period calculations, assume that the cash flow is equally distributed over the year Cash Flow Cost Cash low year 1 Cash flow year 2 Cash flow Cash flow year 4 Cash flow year 5 Cash flow year 6 $8,000 $3.200 $3.200 $3.200 $3 200 $3.200 $3.200 $105,000 $21,000 $10,500 31,500 S0 SO What is the payback period for project A?

Answer 1

CACULATION OF PAYBACK PERIOD OF PROJECT A
Period	Particulars	Inflow (Outflow)	Cumulative Present Value
0	Outflow	$                     -8,000	$               -8,000.00
1	Inflow	$                       3,200	$               -4,800.00
2	Inflow	$                       3,200	$               -1,600.00
3	Inflow	$                       3,200	$                 1,600.00
4	Inflow	$                       3,200	$                 4,800.00
5	Inflow	$                       3,200	$                 8,000.00
6	Inflow	$                       3,200	$               11,200.00
All the investment is recovered in the year 3 but not all the whole year is required for this
So the we have to calculate the fraction as below,
Payback Period =		2 Years +	1,600.0	"/" By	$                  3,200.00
Payback Period =		2 Years +	0.50
Payback Period =		2.50 Years
Answer =Pay back period of Project A = 2.50 Years