Question

A project requires $1000 to be invested today, and is expects to generate cash flows in the future years: CF1=$500, CF2=$400, CF3=$200. What is the REGULAR payback period of this project?


a) 2.5 years b) 3 years c) 1.25 years d) 0.5 years e) Never pay back the cost

Answer 1

Solution:
	Answer is a) 2.50 years
Working Notes:
Notes:	The payback period shows the period at which the Project able to generate cash flows which will repays investment done in the Project at initial stage for the setup of new Project.
	We calculate Payback , first of all we keep cumulative cash flows year wise and keep going till the cumulative cash flows becomes positive. Then we compute Payback period = one year period before the year in which cumulative cash flows becomes positive + (negative value of last negative value in cumulative cash flow column )/ Cash inflow of the year in which cumulative cash flows becomes positive.
	Project
Year	Cash Flow -Product line	Cumulative cash In-Flow
0	-1,000	-1,000
1	500	-500
2	400	-100
3	200	100
	Project payback period is between 2nd and 3rd period as cumulative cash flow becomes positive in 3rd year
	Payback period = 2 years + Remaining balance/3rd year cash inflows
		= 2 + 100/200
		=2.50
		=2.50 years
Hence
The Payback is	2.50	years
Please feel free to ask if anything about above solution in comment section of the question.