Question

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows:

 Year 1 $ 6,500

 Year 2 12,700

 Year 3 15,000

 Year 4 5,800 

Compute the project's payback period. (Answer the number of years i.e., 2. Do not include the word 'years in the answer) 

Answer 1

Year	Annual Cash flow	Cumulative Cash Flow
0	(40000)	(40000)
1	6500	(33500)
2	12700	(20800)
3	(15000)	(5800)
4	5800	NIL
5	NIL

Payback Peroid = A =(B / C)

Where A = Last peroid number with negative Cash flow

B= Absolute Value (i.e. value without negative sign) of cumulative cash flow

and C = Total Cash Inflow during the peroid following peroid A

Here A= 3 , B= 5800 & C = 5800

Therefore payback peroid is 3+ (5800 / 5800)

i.e. 3 + 1 = 4

Answer 4