Question

Initial Outlay   -1,100   -9,500   -5,000
Inflow year 1   700   5,000   1,000
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

(Payback period calculations​) You are considering three independent​ projects: project​ A, project​ B, and project C. Given the cash flow information in the popup​ window​,calculate the payback period for each. If you require a​ 3-year payback before an investment can be​ accepted, which​ project(s) would be​ accepted?

Answer 1

1)

Cumulative cash flow for project 1 = -1,100 + 700 = -400

Cumulative cash flow for project 2 = -400 + 200 = -200

Cumulative cash flow for project 3 = -200 + 300 = 100

200 / 300 = 0.67

Payback period of project A = 2 + 0.67 = 2.67 years

2)

Cumulative cash flow for project 1 = -9,500 + 5,000 = -4,500

Cumulative cash flow for project 2 = -4,500 + 2,000 = -2,500

Cumulative cash flow for project 3 = -2,500 + 2,000 = -500

Cumulative cash flow for project 4 = -500 + 2,000 = 1,500

500 / 2,000 = 0.25

Payback period of project B = 3 + 0.25 = 3.25 years

3)

Cumulative cash flow for project 1 = -5,000 + 1,000 = -4,000

Cumulative cash flow for project 2 = -4,000 + 1,000 = -3,000

Cumulative cash flow for project 3 = -3,000 + 4,000 =1,000

3,000 / 4,000 = 0.75

Payback period of project C = 2 + 0.75 = 2.75 years

4)

Project A and C should be accepted as it has payback period lower than 3 years