Question

A company invests $40,000 in a project with the following net cash flows: Year 1: $3,000 Year 2: $8,000 Year 3: $14,000 Year 4: $19,000 Year 5: $22,000 Year 6: $28,000 In what year does payback occur

Answer 1

Answer:

the payback period is 3.34 years

Explanation:

The computation of the payback period is as follow;

Given that

Year       Cash flows         Cumulative cash flows

0             -$40,000           $-40,000

1               $3,000              $3,000

2              $8,000              $11,000

3              $14,000             $25,000

4              $19,000             $44,000

5              $22,000            $66,000

6               $28,000           $94,000

Now the payback period is

= 3 years +  ($40,000 - $25,000) ÷ $44,000

= 3 years + 0.34

= 3.34 years

Hence, the payback period is 3.34 years