Question

Project L costs $65,000, its expected cash inflows are $14,000 per year for 8 years, and its WACC is 14%. What is the project's payback? Round your answer to two decimal places.

Answer 1

Payback period of the project is 4.64 years

Payback period can be defined as the time it would require a project to recover the initial investment made in it.

Calculation of Payback period

Calculation of Payback Period
Years	Cash flows ($)	Cumulative Cash flows ($)
0	(65,000)	(65,000)
1	14,000	(51,000)
2	14,000	(37,000)
3	14,000	(23,000)
4	14,000	(9,000)
5	14,000	5,000
6	14,000	19,000
7	14,000	33,000
8	14,000	47,000
Payback Period = 4 years + (9000/14000) =4.64 years

At year 4  the difference is ($9000) but if we move to year 5 then we are starting to get positive cash flows of $5000 from the project. Therefore the payback period has to lie between year 4 and year 5.

Therefore Payback period will be 4.64 years in which the project will be able to recover its initial investment.