Answer:
Cumulative cash flows in year 0 = -$55,000
Cumulative cash flows in year 1 = -$55,000
Cumulative cash flows in year 2 = -$55,000 + $35,000 = -$20,000
Cumulative cash flows in year 3 = -$55,000 + 35,000 + $36,000 = $16,000
So, Payback period of three years =2+20000/36000 = 2.5555556 years
Now, as the payback period is less than three years, we should make the investment
However, I do not agree with the decision as payback method does not consider time value of money and ignores all cash flows beyond payback period and hence in this case it is ignoring cash flows in year 4 which is an outflow
NPV=-55000+0/1.08^1+35000/1.08^2+36000/1.08^3-5000/1.08^4=-90.3298767 As NPV is negative, let do not make the investment.
