Question

Project Phoenix costs $1.25 million and yields annual cost savings of $200,000 for seven years. The assets involved in the project can be salvaged for $100,000 at the end of the project. Ignoring taxes, what is the payback period for Project Phoenix?

Answer 1

Total cash flow for year 7 = 200,000 + 100,000 = 300,000

Cumulative cash flow for year 0 = -1,250,000

Cumulative cash flow for year 1 = -1,250,000 + 200,000 = -1,050,000

Cumulative cash flow for year 2 = -1,050,000 + 200,000 = -850,000

Cumulative cash flow for year 3 = -850,000 + 200,000 = -650,000

Cumulative cash flow for year 4 = -650,000 + 200,000 = -450,000

Cumulative cash flow for year 5 = -450,000 + 200,000 = -250,000

Cumulative cash flow for year 6 = -250,000 + 200,000 = -50,000

Cumulative cash flow for year 7 = -50,000 + 300,000 = 250,000

50,000 / 300,000 = 0.167

Payback period = 6 + 0.167 = 6.167 years