Question

What is the payback period for the above set of cash flows? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Answer: 2.74 years

Explanation:

Payback Period is a method of capital budgeting that works by checking how long the project will take to repay the investment outlay.

The formula is;

Payback Period = Year before Payback Period occurs + $\frac{Cash remaining}{Cashflow in year payback happens}$

Initial Outlay = $4,650

First Year = $1,350

Second Year = $2,450

Third Year = $1,150

First year + second year = 1,350 + 2,450 = $3,800

Remaining till repayment = 4,650 - 3,800 = $850

Third year amount of $1,150 is higher than $850 so amount will be repaid in 3rd year.

Payback Period = Year before Payback Period occurs + $\frac{Cash remaining}{Cashflow in year payback happens}$

Payback Period = 2 + $\frac{850}{1,150}$

Payback Period = 2.74 years