Question

Suppose a company has proposed a new 5-year project. The project has an initial outlay of $23,000 and has expected cash flows of $3,000 in year 1, $5,000 in year 2, $6,000 in year 3, $7,000 in year 4, and $8,000 in year 5. The required rate of return is 15% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

Answer 1

HI

A payback is the time period at which project has recovered its initial investment.

Here initial investment = $23000

Y1 cumulative cash flow = -23000 + 3000 = -$20,000

Y2 cumulative cash flow = -20,000 + 5000 = - $15,000

Y3 cumulative cash flow = -15000 + 6000 = -$9,000

Y4 cumulative cash flow = -9,000 + 7000 = -$2,000

Y5 cumulative cash flow = -2000 + 8000 = $6000

Hence payback period will be between 4 and 5 years

payback period = 4-(-2000/8000)

= 4+ 1/4

= 4.25 years or 4.3 years

Thanks