Question

What is the payback period for the following set of cash flows?

Year   Cash Flow

0 -5,360

1 1,591

2 1,572

3   1,531

4     1,800

Answer 1

The Payback period is the time in which the investors gets back the exact amount which he invested in the project.

Years	Cash Flows	Cummulative Cash Flows
0	(5,360.00)	(5,360)
1	1,591.00	(3,769)
2	1,572.00	(2,197)
3	1,531.00	(666)
4	1,800.00	1,134

Cumulative cash flows are the total of cash flows till a specific year:

Cumulative cash flows in year 1 =   (5,360.00) + 1,591.00 = (3,769)
Cumulative cash flows in year 2 =   (5,360.00) + 1,591.00 + 1,572.00 = (2,197)
Cumulative cash flows in year 3 =   (5,360.00) + 1,591.00 + 1,572.00 + 1,531.00 = (666)
Cumulative cash flows in year 4 =   (5,360.00) + 1,591.00 + 1,572.00 + 1,531.00 + 1,800.00 = 1,134

We can see in the third year the investor has got back 5694 (5360-666) of his investment and is only left with 666 more.
To calculate in what time he will get back 666 we will divide 666 by the 4th year's cash flow and add that number with 3 years:
666/1,800.00 = 0.37 years
Payback period = 3 +0.37= 3.37 years