Question

A company has a project with the following cash flows (in Millions). The WACC for the company is 7.5%.

year cash flow

1 $(20,000.00)

0 $2,000.00

2 $ 5,000.00

3 $12,000.00

4 $12,000.00

5 $9,000.00

What is the payback period for this project?

	A.	2.08 years
	B.	3.08 years
	C.	4.08 years
	D.	3.99 years

Answer 1

A company has a project with the following cash flows (in Millions)

Year	Cash flow	Cumulative cash flow
1	$ 2000	$ 2000
2	$ 5000	$ 7000
3	$ 12000	$ 19000
4	$ 12000	$ 31000
5	$ 9000	$ 40000

Payback period is year when cumulatice cash flow crosses inital investment plus (initial investment - cumulative cash flow of previous period)/Cash flow of year in which cumulative cash flow is greater than initial cash flow

So, payback period = 3 + 1000/12000 = 3.08 years

Option B is correct.