Question

assume a $42,000 investment and the following cash flows for two alternatives.

year.       investment x.       investment y
1.              $15,000.                $22,000
2.                14,000.                  15,000
3.                10,000.                  10,000
4.                15,000.                     ----
5.                20,000.                    ------

calculate the payback for investment x and y.

Answer 1

X:

Year	Cash flows	Cumulative Cash flows
0	(42000)	(42000)
1	15000	(27000)
2	14000	(13000)
3	10000	(3000)
4	15000	12000
5	20000	32000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(3000/15000)=3.2 years

Y:

Year	Cash flows	Cumulative Cash flows
0	(42000)	(42000)
1	22000	(20000)
2	15000	(5000)
3	10000	5000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(5000/20000)=2.5 years.