Question

What is the payback period for the following set of cash flows?

Year	Cash Flow
0	$ -5,800
1	2,600
2	1,300
3	1,400
4	2,500

Answer 1

Payback period can be defined as the time it takes for an investment or project to recover the initial investment made.

Calculation of Payback period is as under

It is to be noted that on Year 4 we are getting extra amount $2000 and therefore Payback period cannot be 4. It will lie between Year 3 and 4 and as seen above at 3.2 years the initial investment made will be equal to the cash flows received.

Thus we can conclude that the Payback period is 3.2 years.