Question

A project has the following cash flows. Should the company accept this project based on the Payback Period if the firm requires a payback of 3.0 years?

Year Cash Flow

0 -$28,000

1 11,600

2 11,600

3 6,500

4 6,500

Yes, because the Payback Period is 3.33 years

Yes, because the Payback Period is 2.74 years

No, because the Payback Period is 2.74 years

Yes, because the Payback Period is 2.49 years

Answer 1

Year	0	1	2	3	4
Cashflow	(28,000)	11,600	11,600	6,500	6,500
Cumulative cashflow	(28,000)	(16,400)	(4,800)	1,700	8,200

Payback Period = last period with negative cash flow (A) + (absolute value of cumulative cash flow at the end of the period A / total cash flow during the period after A)

Here year 2 is the last period with negative cash flow .

Payback Period = 2 + (4800/6500)

= 2 +.74

Payback Period = 2.74 years

Company accept this project, because the Payback Period is 2.74 years which is lower than the required payback of 3 years