Question

What is the payback period for a project with an initial investment of $180000 that provides an annual cash inflow of $40000 for the first three years and $25000 per year for years four and five, and $50,000 per year for years six through eight___?a 5.8 yrsb. 5.2 yrsc. 5.4 yrsd. 5.59 yrs

Answer 1

Answer:

Option b: 5.2 Years

Explanation:

Payback period is defined as the amount of time it takes for cash returns or cash inflows of a project to recover the initial investment required for the project.  

Payback period is estimated using the cumulative cashflows. Beginning from the initial investment, deduct annual cash flows of each successive year until the cumulative cashflow turn positive.  

        Cashflow Cumulative Cashflow

Year 0 ($180,000) ($180,000)

Year 1 $40,000  ($140,000)

Year 2 $40,000  ($100,000)

Year 3 $40,000  ($60,000)

Year 4 $25,000  ($35,000)

Year 5 $25,000  ($10,000)

Year 6 $50,000  $40,000  

Year 7 $50,000  $90,000  

Year 8 $50,000  $140,000  

*Figures in brackets show negative cashflows

From the table above, it can be observed that the cumulative cashflow turn positive after year 5, which means that the payback period for the project will be somewhere between year 5 and year 6. Therefore, assuming a constant rate of cash inflows during the year, payback period for the project can be computed as  

Payback period = 5 Years + (10,000/50,000)  Years

Payback Period = 5.2 Years