Question

Calculate the Payback period for an investment project, which presents the following information: Initial Investment =...

Calculate the Payback period for an investment project, which presents the following information:
Initial Investment = $ 410
Cash Flow 1st year = $ 325
Cash Flow 2nd year = $ 65
Cash Flow 3rd year = $ 100

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Answer #1

Payback period is the time to get back the initial investment from the cash flows generated by the project
Payback period = 2 + 20 / 100

= 2 + 0.2

= 2.2 years

As we can see that the initial investment is $410. Therefore payback period will be such period in which we will be able to get back our initial investment. If we look at the table at Year 2 we still require $20 to reach the target of $410. We cannot go to year 3 as there would be surplus of $80  if we take the cash flow of year 3 i.e. $100. We need exactly $410. Therefore it will occur between Year 2 and Year 3. Therefore we use the formula stated above to arrive at our payback period of 2.2 years.

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