Question

Nano Specialist is considering an upgrade project. The estimated cash flows from the upgrade project appear below. What is the project's payback period? Note that year 0 and year 1 cash flows are negative. (Answer in years, round to 2 places)

Year 0 cash flow = -88,000

Year 1 cash flow = -54,000

Year 2 cash flow = 14,000

Year 3 cash flow = 31,000

Year 4 cash flow = 29,000

Year 5 cash flow = 34,000

Year 6 cash flow = 42,000

Year 7 cash flow = 23,000

Answer: _____.

Answer 1

Cash flow in year 1= -$142,000

Cumulative cash flow in year 2= $14,000

Cumulative cash flow in year 3= $45,000

Cumulative cash flow in year 4= $74,000

Cumulative cash flow in year 5= $108,000

 

Payback period = full years until recovery + unrecovered cost at the start of the year/ cash flow during the year

                            = 5 years + ($142,000 - $108,000)/ $42,000

                           = 5 years + $34,000 / $42,000

                           = 5 years + 0.81

                           = 5.81 years.

 

Payback period is 5.81 years.

Payback period is 5.81 years.