Question

Project L requires an initial outlay at t = 0 of $71,000, its expected cash inflows are $15,000 per year for 6 years, and its WACC is 9%. What is the project's payback? Round your answer to two decimal places.

Answer 1

Payback of Project =Year Before the Discounted Payback Period occurs+ cumulative cash flow in the                                                      Year before Recovery/Discounted cash flow in the year after recovery

year	cash flow	Cumulative cash flow
0	-71000
1	15000	15000
2	15000	30000
3	15000	45000
4	15000	60000
5	15000	75000
6	15000	90000

The above calculation shows that in 4 years Rs.60000 has been recovered .Rs. 11000, is balance out of cash outflow. In the 5th year the cash inflow is Rs15000. It means the pay-back period is 4 to 5 years, calculated as follows.

Payback period of Project A= 4 +(11000/15000) Years

                                         =4 +.733 year

                                              =4.73 years

The payback period is 4.73 years.