Question

1. The cash inflows and (outflows) associated with a project are as follows:

Year	Expected net cash flow ($)
0	120000
1	40000
2	50000
3	60000

The payback period for this project would be:

a. 2 years

b. 3 years

c. 2 years and 6 months

d. 2 years and 3 months

Answer 1

Answer = c. 2 years and 6 months

Note:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2+(30000/60000)

= 2.5 Years

= 2 Years and 6 Months

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,20,000.00	-	-1,20,000	(Investment + Cash Inflow)
1	-	40,000.00	-80,000	(Net Cash Flow + Cash Inflow)
2	-	50,000.00	-30,000	(Net Cash Flow + Cash Inflow)
3	-	60,000.00	30,000	(Net Cash Flow + Cash Inflow)