Question

You are evaluating an investment project costing $43,000 initially. The project will provide $3,000 in after-tax cash flows in the first year, $4,000 in the second year and $9,000 each year thereafter for 10 years. The maximum payback period for your company is 7 years.

Attempt 1/1 for 10 pts.

Part 1

What is the payback period for this project?

Answer 1

Year	Cash flow (in $)	Cumulative cash flow (in $)
0	(43,000)	(43,000)
1	3,000	(40,000) -43000+3000
2	4,000	(36,000) -40000+4000
3	9,000	(27,000) -36000+9000
4	9,000	(18,000) -27000+9000
5	9,000	(9,000) -18000+9000
6	9,000	0 -9000+9000
7	9,000
8	9,000
9	9,000
10	9,000
11	9,000
12	9,000

The above formula is useful when payback period falls between 2 complete years (say, 6 years & 5 months). In this case, at year 6, the cumulative cash flow becomes zero, i.e. full investment is recouped by year 6 & therefore payback period = 6 years.

• Simple payback period shows the time taken to recoup an investment made.
• If the cash flows are even, (i.e. exactly the same amount of cash inflow every year. e.g. $5,000 received every year for 5 years) then -
  •