Question

A project has the following cash flows:

Year	0	1	2	3	4
Cash flow	($240,000)	$60,000	$100,000	$60,000	$80,000

The project's payback period is:

a.	four years
b.	three and one-half years
c.	three and one-quarter years
d.	none of the above

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(240,000)	(240,000)
1	60,000	(180,000)
2	100,000	(80,000)
3	60,000	(20,000)
4	80,000	60,000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(20,000/80,000)

=3.25 years

Hence the correct option is:

three and one-quarter years