Question

Project B costs $52,125. The project’s cash revenues are expected to be $12,000 per year for 5 years. If the WACC is 12%, what is the project's simple payback period?

		0.23 years
		2.22 years
		4.34 years
		5.94 years
		10.01 years

Answer 1

Sol:

Project cost = $52,125

Expected revenues = $12,000

Period = 5 years

To determine project's simple payback period:

Payback period is the amount of time the investment will take to recover it cost. It is the time taken for an investment to breakeven.

The expected cash flows are constant per year at $12,000, therefore the payback period will be equal to:

Payback period = Project cost / Expected revenues

Payback period = $52,125 / $12,000

Payback period = 4.34 years.

Therefore project's simple payback period will be 4.34 years

Alternative method

Year	Cash flows	Cumulative cash flow
0	-52125	-52125
1	12000	-40125
2	12000	-28125
3	12000	-16125
4	12000	-4125
5	12000	7875

The cumulative cash flows is positive in 5th year, therefore the payback period will be 4 year plus a portion of 5th year for the investment to breakeven.

Payback period = 4 + (4125/12000) = 4.34 years

Working