Question

Problem 10-5
Payback

A project has an initial cost of $57,700, expected net cash inflows of $11,000 per year for 7 years, and a cost of capital of 12%. What is the project's payback period? Round your answer to two decimal places.

______ years

Answer 1

Payback of Project =Year Before the Discounted Payback Period occurs+ cumulative cash flow in the                                                      Year before Recovery/Discounted cash flow in the year after recovery

Year	Cash Flow	Cumulative cash flow
1	11000	11000
2	11000	22000
3	11000	33000
4	11000	44000
5	11000	55000
6	11000	66000
7	11000	77000

Initial investment = $57700

The above calculation shows that in 5th years $ 55000 has been recovered and $2700, is balance out of cash outflow. In the 2nd year the cash inflow is $11000. It means the pay-back period is one to two years, calculated as follows.

Payback period of Project A= 5 Year+(2700/11000)*12 Months

                                         =5 year+2.945 Months