Question

QUESTION Match up the payback period with the cash flows.

CF0: -1360 CF1: 560 CF2: 330 CF3: 820 CF4: 200

CF0: -530 CF1: 500 CF2: 100 CF3: 970 CF4: 130

CF0: -900 CF1: 680 CF2: 110 CF3: 950 CF4: 180

CF0: -1675 CF1: 580 CF2: 240 CF3: 700 CF4: 180

CF0: -1230 CF1: 590 CF2: 240 CF3: 550 CF4: 410

A. About 2.73 years B. About 2.12 years C. About 3.86 years D. About 2.57 years E. About 1.30 years

Answer 1

a.

Year	Cash flows	Cumulative Cash flows
0	(1360)	(1360)
1	560	(800)
2	330	(470)
3	820	350
4	200	550

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

=2+(470/820)=2.57 years(D).

b.

Year	Cash flows	Cumulative Cash flows
0	(530)	(530)
1	500	(30)
2	100	70
3	970	1040
4	130	1170

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

=1+(30/100)=1.30 years(E).

c.

Year	Cash flows	Cumulative Cash flows
0	(900)	(900)
1	680	(220)
2	110	(110)
3	950	840
4	180	1020

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

=2+(110/950)=2.12 years(B).

d.

Year	Cash flows	Cumulative Cash flows
0	(1675)	(1675)
1	580	(1095)
2	240	(855)
3	700	(155)
4	180	25

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+(155/180)=3.86 years(C).

e.

Year	Cash flows	Cumulative Cash flows
0	(1230)	(1230)
1	590	(640)
2	240	(400)
3	550	150
4	410	560

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

=2+(400/550)=2.73 years(A).