Question

A company is considering a project with the following characteristics:

Cash outflows:

• Immediate investment in equipment: $516,197
• Cash outflow for equipment maintenance in year 2: $50,000

Cash inflows:

• Cash savings in year 1: $250,000
• Cash savings in year 2: $250,000
• Cash savings in year 3: $150,000
• Cash savings in year 4: $100,000
• Cash savings in year 5: $50,000
• Salvage value at the end of year 5: $40,000

What is the Payback Period (in years) for this project? (Please round to 2 decimal places.)  

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Net Investment	($476197)	-	-	-	-	-
Cash Outflow	-	-	($50000)	-	-	-
Cash Savings	-	$250000	$250000	$150000	$100000	$50000
Balance	($476197)	($226197)	($26197)	$123803	$223803	$273803

Net Cash Outflow = (Initial Investment - Salvage value) = ($516197 - $40000) = $476197

From the above table we see that Net Cash outflow is recovered somewhere in Year 2 and Year 3
Payback period = Year before full recovery + (Unrecovered investment during the start of the year / Cash flow during the year)
=> 2 + ($26197 / $150000)
=> 2 + 0.1746
=> Payback period = 2.17 (Ans)