Question

Payback: Quebec Ltd is purchasing machinery at a cost of $4,424,766. The company expects, as a result, cash flows of $751,751, $1,196,086, and $2,756,146 over the next three years. The payback period is

years.

(Round your answer to 2 decimal places. All intermittent calculations should be rounded to 4 decimal places before carrying to next calculation.)

Answer 1

Payback Period

- The Payback Period Method refers to the period in which the proposed project will generate the cash inflows to recover the Initial Investment costs. It considers only three components such as Initial Investment costs, Economic life of the project and the annual cash inflows

- Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected.

Year	Annual cash flow ($)	Cumulative net Cash flow ($)
0	-4,424,766	-4,424,766
1	751,751	-3,673,015
2	1,196,086	-2,476,929
3	2,756,146	279,217

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2.00 Years + ($2,476,929 / $2,756,146)

= 2.00 Years + 0.90 Years

= 2.90 Years

“Hence, the Payback Period will be 2.90 Years”