Question

A project has the following cash flows:

                                                                                 Project

Year                    Cash Flow

0                         -$3,000

1                            1,000

2                            1,000

3                            1,357.51

                                                   4                            1,000

Its cost of capital is 10 percent.  What is the project’s payback period?

Answer 1

Calculating the Project's payback period:-

Year	Cash Flows of Project ($)	Cummulative Cash Flows of Project ($)
0	(3,000.00)	(3,000.00)
1	1,000.00	(2,000.00)
2	1,000.00	(1,000.00)
3	1,357.51	357.51
4	1,000.00	1,357.51
	1,357.51

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

= 2 years + (1000/1357.51)

= 2.74 years

So, Project's Payack Period is 2.74 years