Question

The calculation of the payback period for an investment when net cash flow is uneven is: Multiple Choice Determining the net present value for each cash flow. Determining which depreciation method will shorten the period. Determining when the cumulative total of net cash flows reaches zero. Determining the applicable hurdle rate. Determining when net income equals the cost of the investment.

Answer 1

Answer:

Determining when the cumulative total of net cash flows reaches zero.

Explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Assume 20,000 was invested in a project, Cash flows in year 1 = 10,000 cash flow in year 2 = 20,000

Payback = 1.5 years

Amount invested = -20,000

Amount recovered in year 1 = -20,000 + 10,000= -10,000

Amount recovered in year 2 = -10,000 + 15,000 = 5000

Payback = 1 + 10,000 / 15,000 = 1.5