Question

Assume a $72,000 investment and the following cash flows for two alternatives.

year.          investment a.         investment b
1.                  $25,000.                 $22,000
2.                    25,000.                   15,000
3.                    15,000.                   50,000
4.                    10,000.                    --------
5.                    30,000.                   ---------

calculate the payback for investment A and B

Answer 1

X:

Year	Cash flows	Cumulative Cash flows
0	(72000)	(72000)
1	25000	(47000)
2	25000	(22000)
3	15000	(7000)
4	10000	3000
5	30000	33000

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+(7000/10000)=3.7 years

Y:

Year	Cash flows	Cumulative Cash flows
0	(72000)	(72000)
1	22000	(50000)
2	15000	(35000)
3	50000	15000

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+(35000/50000)=2.7 years.