Question

A project has an initial cost of $6,500. the cash inflows are $900, $2,200, $3,600, and $4,100 over the next four years, respectively. what is the payback period?

Answer 1

Pay Back Period is a capital budgeting technique which shows the period at which the initial investment is returned in a project.

Payback Period = A + (B ÷ C)

In the above formula,

A is the last period with a negative cumulative cash flow = 2 Years;

B is the absolute value of cumulative cash flow at the end of the period A = $3,400;

C is the total cash flow during the period after A = $3,600

Payback period = 2 + ( $3,400 ÷ $3,600)

= 2 + 0.9444

= 2.944 years

Therefore, the payback period is 2.944 years.

*Note: The image attach shows the calculation of Cumulative cash flows)