Question

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Park Co. is considering an investment that requires immediate payment of $27,500 and provides expected cash inflows of $11,800 annually for four years. What is the investment's payback period? Payback Period Choose Denominator: Choose Numerator: T = Payback Period = Payback period

Answer 1

Payback Period refers to the period by which the outflow will be recovered from the inflows.
To calculate the payback period, we need to first calculate the cumulative cash inflows for the given period and then divide it by the amount of cash outflow, i.e.
Payback Period = Cumulative Cash Inflow / Cash Outflow

In the given case,
Cumulative Cash Inflow = $11,800 x 4 years = $47,200
Cash Outflow = $27,500
Payback Period = $47,200 / $27,500 = 1.72 years (or 1 year and 8.5 months)