Question

A project with an initial cost of $26,550 is expected to generate cash flows of $6,400, $8,500, $9,000, $7,900, and $7,200 over each of the next five years, respectively. What is the project's payback period?

Multiple Choice

• 3.71 years

• 3.71 years

• 3.54 years

• 3.45 years

• 3.34 years

Answer 1

Solution: Pay back period means time required to earn back the cost incurred in investment through successive inflows

Cash inflow is uneven the pay back formula cannot apply. we can compute payback by using cumulative cash inflow.

Intial Investment 26500$

Year	CASH INFLOW	CUMULATIVE CASH INFLOW
1	6400$	6400
2	8500$	14900(6400+8500)
3	9000$	23900(14900+9000)
4	7900$	31800(23900+7900)
5	7200$	39000(31800+7200)

Pay Back Period = 3+ 2650/7900

= 3+0.34=3.34 Years

Unrecovered amount start at 4th year

Intial Cost- Cumulative cash inflow at the end of 3rd year

26550-23900=2650

So pay back period of this project is 3rd year . Amount invested can be recover in almost third year

So Answer is 3.34 year