Question

Project L costs $35,000, its expected cash inflows are $15,000 per year for 10 years, and its WACC is 13%. What is the project's payback? Round your answer to two decimal places.

  years

Answer 1

Payback period represents the time period in which the initial investment in a project is recovered.

Payback period is computed as follows:

The cumulative cash inflow of year 1 and 2 is computed as follows:

= $ 15,000 + $ 15,000

= $ 30,000

The cumulative cash inflow of year 1, 2 and 3 is computed as follows:

= $ 15,000 + $ 15,000 + $ 15,000

= $ 45,000

It means that the initial investment of $ 35,000 is recovered between year 2 and year 3 and hence the payback period lies between year 2 and year 3 and is computed as follows:

= 2 years + Remaining investment to be recovered / Year 3 cash inflow

= 2 years + ( $ 35,000 - $ 30,000) / $ 15,000

= 2.33 years Approximately

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