Question

Project K has an initial required investment of $1,000,000. The project will result in operating cash inflows of $200,000 per year for Years 1-3, $100,000 per year for Years 4-9, and have no cash flows in Year 10 and beyond. Calculate the payback period for Project K.

Answer 1

Year	Cash Flow	Cumulative Cash flow
0	$ (1,000,000)	$                    (1,000,000)
1	$       200,000	$                        (800,000)
2	$       200,000	$                        (600,000)
3	$       200,000	$                        (400,000)
4	$       100,000	$                        (300,000)
5	$       100,000	$                        (200,000)
6	$       100,000	$                        (100,000)
7	$       100,000	$                                        -
8	$       100,000	$                          100,000
9	$       100,000	$                          200,000

Payback periodis 7 years.

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