Question

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $ 66,200 $ 67,700 Net cash flow: Year 1 23,400 4,700 Year 2 23,400 30,700 Year 3 23,400 30,700 Year 4 0 23,500 The payback period in years for Project Y is

Answer 1

Year	Net Cash Flow from project Y	Cummulative Cash Flow
0	$ (67,700.00)	$       (67,700.00)
1	$     4,700.00	$       (63,000.00)
2	$   30,700.00	$       (32,300.00)
3	$   30,700.00	$         (1,600.00)
4	$   23,500.00	$        21,900.00

Payback Period =	A+		B
			C
In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Payback Period =	3+	$              1,600.00
		$            23,500.00

Payback Period of project Y =	(3+0.07)	3.07	Years