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**

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project B, and project C. Given the cash flow information in the
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require a 3-year payback before an investment can be accepted,
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-10,000 -5,500
Inflow year 1 600 4,000
2,000
Inflow year 2 300 4,000
2,000
Inflow year 3 100 4,000
4,000
Inflow year 4 200 4,000
4,000
Inflow year 5 500 4,000
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Initial Outlay -1,100 -9,500
-5,000
Inflow year 1 700 5,000
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Inflow year 2 200 2,000
1,000
Inflow year 3 300 2,000
4,000
Inflow year 4 100 2,000
4,000
Inflow year 5 600 2,000
4,000
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C0
C1
C2
C3
C4
A
-10,000
+1,000
+1,000
+2,000
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B
-5,000
0
+1,000
+1,500
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C
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Time
0
1
2
3
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?5,000
1,000
3,000
5,000
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Time
Project A
Project B
0
($375)
($575)
1
($300)
$190
2
($200)
$190
3
($100)
$190
4
$600
$190
5
$600
$190
6
$926
$190
7
($200)
$0
f.
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Time period
0
1
2
3
4
5
6
7
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(375)...

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A
Project B
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Cash
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0
-$11,000
-$9,000
1
1,500
6,000
2
3,000
4,000
3
5,000
3,000
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1
2
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4
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0
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4,000
4,000
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-3,000
0
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a.
Project 3
b.
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c.
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d.
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Gardial Fisheries is considering two mutually exclusive
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2 ($200) $190
3 ($100) $190
4 $600 $190
5 $600 $190
6 $926 $190
7 ($200) $0
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