Question

You are considering three independent projects, Project A, Project B and Project C. Given the following cash flow information, calculate the payback period for each.

Year	Project A	Project B	Project C
0 (Investment)	($ 900)	($ 9,000)	( $7,000)
1	$ 600	$ 5,000	$ 2,000
2	$ 300	$ 3,000	$ 2,000
3	$ 200	$ 3,000	$ 2,000
4	$ 100	$ 3,000	$ 2,000
5	$ 500	$ 3,000	$ 2,000

Answer 1

A:

Year	Cash flows	Cumulative Cash flows
0	(900)	(900)
1	600	(300)
2	300	0
3	200	200
4	100	300
5	500	800

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2 years

B:

Year	Cash flows	Cumulative Cash flows
0	(9000)	(9000)
1	5000	(4000)
2	3000	(1000)
3	3000	2000
4	3000	5000
5	3000	8000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(1000/3000)

=2.33 years(Approx).

C:

Payback period=initial investment/annual cash flows

=(7000/2000)

=3.5 years