Question

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

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
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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.

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