Question

Payback period. What are the payback periods of projects E and​ F? Assume all the cash flow is evenly spread throughout the year. If the cutoff period is 3 ​years, which​ project(s) do you​accept?

Cash Flow E F
Cost 36,000   95,000
Cash flow year 1   9,000 9,500
Cash flow year 2   9,000   19,000
Cash flow year 3   9,000   28,500
Cash flow year 4   9,000   38,000
Cash flow year 5   9,000   0
Cash flow year 6   9,000   0

Answer 1

Project E

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= $9,000 + $9,000 + $9,000 + $9,000

                         = $36,000.

Therefore, the payback period is 4 years.

Project F

Payback period= $9,500 + $19,00 + $28,500 + $38,000

                         = $95,000

Therefore, the payback period is 4 years.

Neither projects are not accepted since they don’t meet the payback cutoff period of 3 years.

In case of any query, kindly comment on the solution.