Question

Consider the following three minus year project. The initial afterminustax outlay or afterminustax cost is​ $1,500,000. The future afterminustax cash inflows for years​ 1, 2, 3 and 4​ are: $800,000,​ $800,000, $300,000 and​ $100,000, respectively. What is the payback period without discounting cash​ flows?

Answer 1

Answer:

1.875 years

Explanation:

Payback period is a capital appraisal technique that allows to identify the time it takes to recover initial outlay of a project.

The Payback period for this period can be computed as,

Initial outlay = $1,500,000

First Subtract the first year cash flow to find residual out lay,

Year 0     =  (1,500,000)

Year 1      =  800,000        Residual Outlay  = (1500,000-800,000) = $700,000

Since year 2 cash flows are more than residual outlay, the payback period is,

Payback Period = 1 + (700,000/800,000) = 1.875 years

here "1" refers to year 1.

Hope that helps.