Question

MUST show Excel calculation for payback

		Expected Net Cash Flows
	Time	Project A	Project B
	0	($375)	($575)
	1	($300)	$190
	2	($200)	$190
	3	($100)	$190
	4	$600	$190
	5	$600	$190
	6	$926	$190
	7	($200)	$0
f.   What is the regular payback period for these two projects?
Project A
	Time period	0	1	2	3	4	5	6	7
	Cash flow	(375)	(300)	(200)	(100)	600	600	926	(200)
	Cumulative cash flow	-$375	-$675	-$875	-$975	-$375	$225	$1,151	$951
Intermediate calculation for payback
Payback using intermediate calculations		4.625

Answer 1

Payback Period is the value in years at which the invested amount is recovered. Here cash flows are not discounted.

To find this, first cumulative cash flows for each year is calculated.

Time	Project A	Project B	Cumulative CF(A)	Cumulative CF(B)
0	-375	-575	-375	-575
1	-300	190	-675	-385
2	-200	190	-875	-195
3	-100	190	-975	-5
4	600	190	-375	185
5	600	190	225	375
6	926	190	1151	565
7	-200	0	951	565

Project(A) cash flows are positive from year 5 on wards.

So after 4 years, the remaining capital to be recovered is 375. So from the next year cash flow of 600, it is recovered as 375/600.

So Payback period is calculated as

4 + (375/600) = 4 + 0.625 = 4.625 years the Project pays back the invested amount.

Similar calculation for Project(B):

Project B starts receiving positive cash flows from the year 4. So Payback period = 3 + (5/190) = 3 + 0.02632 = 3.03 (rounded to 2 decimals)