Question

Based on the following cash flows, calculate the payback period.

Year            CF    
0                -$1,358
1                 $369
2                 $220
3                 $92
4                 $356
5                 $530

Enter your answer rounded off to two decimal points.

Answer 1

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

$369 + $220 + $92 + $356 = $1,037

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

$1,358 - $1,037 = $321

in cash flows. During the fifth year, the cash flows from the project will be $530. So, the payback period will be four years, plus what we still need to make divided by what we will make during the fifth year. The payback period is:

Payback = 4 + ($321 / $530) = 4.61 years