What is the payback period for the following set of cash flows?
Year 
Cash flow 
0 
$40,000 (it is minus!) 
1 
$10,000 
2 
$5,000 
3 
$20,000 
4 
$5,000 
5 
$10,000 
A. 
2 years 

B. 
4 years 

C. 
3 years 

D. 
1 year 

E. 
5 years 
Ans: Payback period B) 4 years
Calculation of Pay back Period
Year  Cash Flow  Cumulative Cash Flow 
0  $(40,000.00)  $(40,000.00) 
1  $10,000.00  $(30,000.00) 
2  $5,000.00  $(25,000.00) 
3  $20,000.00  $(5,000.00) 
4  $5,000.00  $ 
5  $10,000.00  $10,000.00 
Step 1 : Calculate the Cumulative net cash flow.
Step 2 : Calculation of Pay back Period
Payback Period = A +B/C
where,
A is the last period number in which cash flow is negative
or 0 (i.e.. 4)
B is the absolute cumulative net cash flow ignoring
negative sign at the end of the period A (i.e. 0)
C is the total cash inflow during the period next to
period A (i.e. 10,000)
Payback Period = 4 + 0 / 10000
Payback Period = 4 years
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