Question

19. Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year	0	1	2	3	4	5
Cash flows	-$975	$300	$310	$320	$330	$340

	a.	2.54 years
	b.	2.42 years
	c.	3.83 years
	d.	3.14 years
	e.	3.61 years

Answer 1

Payback period:

Payback period is the period in which initial investment is recovered.

PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Cash flow in Next Year ]
If Actual PBP > Expected PBP - Project will be rejected
Actual PBP </= Expected PBP - Project will be accepted

Year	Opening Balance	Cash Flow	Closing Balance
1	$               975.00	$            300.00	$             675.00
2	$               675.00	$            310.00	$             365.00
3	$               365.00	$            320.00	$               45.00
4	$                  45.00	$            330.00	$           -285.00
5	$              -285.00	$            340.00	$           -625.00

PBP = Year in which least +ve Closing Balance + [ Closing balance at that year / Cash flow in Next Year ]
= 3 Years + [ $ 45 / $ 330 ]
= 3 Years + 0.14 Years
= 3.14 Years

Payback Period is 3.14 Years

OPtion D is correct

PBP Refer Payback Period

Pls comment, if any further assistance is required.