Question

Turnkey, Inc., is considering a project with an initial cost of $36,000. The project will produce cash inflows of $12,000 a year for the first 2 years and $18,000 a year for the following 2 years. What is the payback period? ANSWER IS 2.67 YEARS PLEASE SHOW STEPS WITHOUT USING EXCEL

Answer 1

Payback period is a period at which the cash outflows at the beginning will be recovered by the cash inflows.

In this case it can be seen that there is normal payback period which is required to be calculated without any discounting rate.

Total outflow= 36000

Recovery in first two years= (12,000+ 12,000)= 24000

Recovery should only be 12000 more to cover the overall outflows at the beginning because

= (36000-24000)=12000

But it can be seen that the recovery for the entire year is 18000.

So it will be apportioned adequately in the third year like-

Payback period= 2 Years+((36000-24000)/18000)

= 2 years+ (12000/18000)

= 2.66666 years or 2.67 years.

So,correct answer is 2.67 years