Question

The payback period for the following set of cash flows is years.(Round your answer to 2 decimal places. (e.g., 32.16))

Year Cash Flow

0 −$3,600

1 1,000

2 1,800

3 1,300

4 1,200

Answer 1

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the project has created:

$1,000 + $1,800 = $2,800

in cash flows. The project still needs to create another:

$3,600 - $2,800 = $800

in cash flows. During the third year, the cash flows from the project will be $1,300. So, the payback period will be 2 year, plus what we still need to make divided by what we will make during the third year. The payback period is:

Payback = 2 + ($800 / $1,300) = 2.62 years