Question

Calculate the payback for a project with an initial investment of $12,000 and these following csh inflows:

Year	Cash Inflow
1	$4,000
2	$3,000
3	$2,000
4	$6,000
5	$1,000
6	$7,000

Answer 1

The payback period represents the time period in which the initial investment of a project is recovered.

The cumulative cash flows of year 1, 2 and 3 is computed as follows:

= $ 4,000 + $ 3,000 + $ 2,000

= $ 9,000

The cumulative cash flows of year 1, 2, 3 and 4 is computed as follows:

= $ 4,000 + $ 3,000 + $ 2,000 + $ 6,000

= $ 15,000

It means that the initial investment of $ 12,000 is recovered between year 3 and year 4, which implies that the payback period lies between year 3 and 4.

So, the payback period will be:

= 3 years + Remaining amount of investment to be recovered / Year 4 cash flow

= 3 years + ( $ 12,000 - $ 9,000) / $ 6,000

= 3.50 years

Feel free to ask in case of any query relating to this question