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saw5 [17]
2 years ago
9

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respect

ively. What is the payback period
Business
1 answer:
monitta2 years ago
4 0

Answer:

Thus, payback period is = 3 years and 1.61 months

Explanation:

Payback period is the time it will take the project cash flows to recover the initial investment. The payback period for the project in question will be,

<u>Year</u>       <u>Cash flow</u>      <u>Remaining Amount</u>

1               850               (6900 - 850) = 6050

2              2400             (6050 - 2400) = 3650

3              3100              (3650 - 3100) = 550

As the year 4 cash flow is 4100, we know that the amount will be recovered in year 4. However, we will calculate the exact period or months in year 4 that it will take to recover total initial investment assuming that cashflow occurs at constant rate through out the year.

Time = 550 / 4100 * 12 = 1.61 months

Thus, payback period is = 3 years and 1.61 months

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