Question

14) What is the payback period for the following project?

Year /Cash Flow

0/ -$14,500.00

1/ $2,200.00

2/ $4,800.00

3/ $6,500.00

4/ $5,500.00

A) 3.18 years B) 3.44 years C) 3.23 years D) 3.74 years E) 3.59 years

Answer 1

A) 3.18 years

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created:

$2,200.00 + $4,800.00 + $6,500.00 = $13,500.00

in cash flows. The project still needs to create another:

$14,500.00 - $13,500.00 = $1,000.00

in cash flows. During the fourth year, the cash flows from the project will be $5,500.00. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is:

Payback = 3 + ($1,000.00 / $5,500.00)

Payback = 3.18 years