Question

An investment project provides cash inflows of $975 per year for eight years. a. What is the project payback period if the initial cost is $3,500? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What is the project payback period if the initial cost is $4,550? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the project payback period if the initial cost is $8,800? (Enter O if the project never pays back. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a. Payback period |ь. Раyback period c. Payback period years years years

Answer 1

a

Project
Year	Cash flow stream	Cumulative cash flow
0	-3500	-3500
1	975	-2525
2	975	-1550
3	975	-575
4	975	400
5	975	1375
6	975	2350
7	975	3325
8	975	4300
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-575))/(400-(-575))
3.59 Years

b

Project
Year	Cash flow stream	Cumulative cash flow
0	-4550	-4550
1	975	-3575
2	975	-2600
3	975	-1625
4	975	-650
5	975	325
6	975	1300
7	975	2275
8	975	3250
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 4 and 5
therefore by interpolation payback period = 4 + (0-(-650))/(325-(-650))
4.67 Years

c

Project
Year	Cash flow stream	Cumulative cash flow
0	-8800	-8800
1	975	-7825
2	975	-6850
3	975	-5875
4	975	-4900
5	975	-3925
6	975	-2950
7	975	-1975
8	975	-1000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
This is not happening during project life hence it cannot be calculated