Question

Project L requires an initial outlay at t = 0 of $48,000, its expected cash inflows are $13,000 per year for 8 years, and its WACC is 10%. 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, 2 and 3 is computed as follows:

= $ 13,000 + $ 13,000 + $ 13,000

= $ 39,000

The cumulative cash inflow of year 1, 2, 3 and 4 is computed as follows:

= $ 13,000 + $ 13,000 + $ 13,000 + $ 13,000

= $ 52,000

It means that the initial investment of $ 48,000 is recovered between year 3 and year 4 and hence the payback period lies between year 3 and year 4 and is computed as follows:

= 3 years + Remaining investment to be recovered / Year 4 cash inflow

= 3 years + ( $ 48,000 - $ 39,000) / $ 13,000

= 3.69 years Approximately

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