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1. Using a conservative end of period cash flow approach when applying the conventional payback method,...

1. Using a conservative end of period cash flow approach when applying the conventional payback method, what is the payback period when the upfront investment is 124,000 and the end of period cash flow is 25,000?

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Answer #1

Conventional payback period is period in which cumulative cash flow turn positive. it does not takes into effect of discounting the future cash flows.

Cumulative cash flow is calculated by adding the cumulative cash flow uptill previous year and net cash flow of the current year

Year Cash flow Cumulative cash flow
0 -124000.00 -124000.00
1 25000.00 -99000.00
2 25000.00 -74000.00
3 25000.00 -49000.00
4 25000.00 -24000.00
5 25000.00 1000.00

showing formula in excel

Year Cash flow Cumulative cash flow
0 -124000 =J4
1 25000 =K4+J5
2 25000 =K5+J6
3 25000 =K6+J7
4 25000 =K7+J8
5 25000 =K8+J9

Pay back period is 5 years as cumulative cash flow turns +ve in 5th year.

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