Answer:
Payback period (A) is 3.44 years
Payback period (B) is 2.39 years
Explanation:
Cash Flow (A) –$428,000; $42,500; $63,500; $80,500; $543,000
Cash Flow (B) –$41,500; $20,700; $13,000; $20,100; $16,900
The payback period will note consider discounting rate, thus we do manual counting till the cash flow equal to zero (0)
Payback period = Number of Years immediately preceding year of break-even + (investment - cashflow of Years immediately preceding year of break-even)/ cashflow of year break- even
Project A will be break even in Year 4, then
Payback period (A) = 3 years + ($428,000 - ($42,500+$63,500+$80,500))/ $543,000 = 3.44 years
Project B will be break even in Year 3, then
Payback period (B) = 2 years + ($41,500 - ($20,700+$13,000))/$20,100 = 3.44 years = 2.39 years
