Question

Calculate the Pay-off Period for an IS project that has a $300,000 development cost in year...

Calculate the Pay-off Period for an IS project that has a $300,000 development cost in year 1 and annual $50,000 maintenance costs from year 2 onwards. The benefits are expected to be $100,000 in Year 2 and growing $25,000 a year as adoption of the system increases. The discount rate is 0%.

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Answer #1

Answer:-

Payback (pay-off) period: 4.6 years

Year Cash flow Net Cash flow
1 -300000 -300000
2 =100000-50000=50000 -300000+50000=250000
3 =100000+25000-50000=75000 -250000+75000=-175000
4 =100000+25000+25000-50000=100000 -175000-100000=75000
5 =100000+25000+25000+25000-50000=125,000 -75000+125,000=

Positive net cash flow will start from year 5

Hence, Pay-off period is between 4 and 5 years.

Pay off period = Complete years + (Remaining cost to be recovered/Cash flow)

= 4 + (75000/125000) = 4+0.6 = 4.6 years

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