Question

An investment project provides cash inflows of $745 per year for eight years.

a.	What is the project payback period if the initial cost is $1,700? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
b.	What is the project payback period if the initial cost is $3,300? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
c.	What is the project payback period if the initial cost is $6,100? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Payback period is the period within which the initial cost is recovered by the cash inflows. In case of unequal cash inflows, we need to calculate the cumulative cash flows year by year to compute the payback period. However, in the current question, their are equal annual cash flows. So, payback period is computed as -

Payback period = Initial cost / Annual cash inflows

a) Payback period = $1700 / $745 = 2.28 years

b) Payback period = $3300 / $745 = 4.43 years

c) Payback period = $6100 / $745 = 8.19 years

Notice that it is more than 8 years and cash inflows stop after 8 years. So, in this case it'll be 0.