Question

25) Refer to the capital budgeting narrative: Assume that the firm has a threshold of 3.2 years, then based on the PB method.

Capital Budgeting Narrative:
(Use the folowing information for questions referring to the narrative): Gevrek Communications is considering a new project. The initial investment is $85,103.35. and the cost of capital is 10%. Expected cash flows over the next four years are given below:

Year	Cash Flow ($)
1	14,000
2	35,000
3	42,000
4	40,000

EDIT: normal payback period, not discounted

Answer 1

For normal payback, we do not consider the discount rate or cost of capital 10%.

The Cumulative cash flows are as shown in the table below:

Year	Cash flow	Cumulative Cash flow
0	-85103.35	-85103.35
1	14000	-71103.35
2	35000	-36103.35
3	42000	5896.65
4	40000	45896.65

Payback period (normal) = Last year of negative cumulative cash flow + Absolute value of the cumulative cash flow that year/ Cash flow next year

Payback period (normal) = 2 +36103.35/42000 = 2 +0.8596 = 2.8596 = 2.86 Years