Question

The following table describes the cash flow schedule of an investment project. What is the payback period?

Year	Cash Flow
0 1 2 3 4 5	-100,000 30,000 50,000 15,000 7,000 7,000

4.5 years

4 years

3 years

5 years

Answer 1

Given cash flow about a project,

Its cumulative cash flows are also calculated as below:

cumulative cash flow = previous year cumulative cash flow + current year cash flow

Year	Cash flow	Cumulative cash flow
0	-100000	-100000
1	30000	-70000
2	50000	-20000
3	15000	-5000
4	7000	2000
5	7000	9000

Payback period of a project = year before the cumulative cash flow turns positive + (cumulative cash flow of period before recovery/cash flow of recovery period)

So, here Payback period = 3 + 5000/7000 = 3.71 years or approximately 4 years