Question

Find the Payback period for the following project:

	Project Y
Initial Outlay	$18,000
Year 1	$5,460
Year 2	$5,740
Year 3	$5,230
Year 4	$6,090

The answer should be calculated to two decimal places.

Answer:

Answer 1

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

$5,460 + $5,740 + $5,230 = $16,430

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

$18,000 - $16,430 = $1,570

in cash flows. During the fourth year, the cash flows from the project will be $6,090. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is:

Payback = 3 + ($1,570 / $6,090) = 3.26 years