Question

What is the payback period for the following set of cash flows? Year Cash Flow 0 −$ 4,300 1 2,000 2 1,800 3 2,000 4 2,200

Answer 1

Payback Period refers to amount of time taken to recover the cost of investment.

Computation of Payback Period

Year	Cash Flows	Cumulative Cash Flows
0	$(4,300)	$(4,300)
1	$2,000	$(2,300)
2	$1,800	$(500)
3	$2,000	$1,500
4	$2,200	$3,700

Payback Period = t + CCF / CF

where,

t = time period when cumulative cash flow was last negative
CCF = Cumulative Cash flow of period t
CF = Cash Flow of the period following the period t

Payback Period = 2 + ( $500 / $2,000 )
= 2 + 0.25
= 2.25 years

Payback Period = 2.25 years