Question

Project L requires an initial outlay at t = 0 of $70,000, its expected cash inflows are $13,000 per year for 6 years, and its WACC is 14%. 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 from year 1 to year 5 is computed as follows:

= $ 13,000 x 5

= $ 65,000

The cumulative cash inflow from year 1 to year 6 is computed as follows:

= $ 13,000 x 6

= $ 78,000

It means that the initial investment of $ 70,000 is recovered between year 5 and year 6 and hence the payback period lies between year 5 and year 6 and is computed as follows:

= 5 years + Remaining investment to be recovered / Year 4 cash inflow

= 5 years + ( $ 70,000 - $ 65,000) / $ 13,000

= 5.38 years Approximately

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