Question

Match up the payback period with the cash flows.

-       A.       B.       C.       D.       E.    CF0: -905 CF1: 830 CF2: 130 CF3: 770 CF4: 270       -       A.       B.       C.       D.       E.    CF0: -1075 CF1: 850 CF2: 320 CF3: 730 CF4: 100       -       A.       B.       C.       D.       E.    CF0: -750 CF1: 690 CF2: 210 CF3: 830 CF4: 120       -       A.       B.       C.       D.       E.    CF0: -865 CF1: 850 CF2: 130 CF3: 530 CF4: 260       -       A.       B.       C.       D.       E.    CF0: -1095 CF1: 980 CF2: 120 CF3: 690 CF4: 480

A. About 1.29 years B. About 1.58 years C. About 1.12 years D. About 1.70 years E. About 1.96 years

Answer 1

Payback period is the time period in which the initial investment is recovered
Year	Cash flows	Cumulative Cash flows
0	-905	-905
1	830	-75
2	130	55
3	770	825
4	270	1095
Payback period = 1 + 75/130 = 1.58 years i.e. B

Payback period is the time period in which the initial investment is recovered
Year	Cash flows	Cumulative Cash flows
0	-1075	-1075
1	850	-225
2	320	95
3	730	825
4	100	925
Payback period = 1 + 225/320 = 1.70 years i.e. D

Year	Cash flows	Cumulative Cash flows
0	-750	-750
1	690	-60
2	210	150
3	830	980
4	120	1100
Payback period = 1 + 60/210 = 1.29 years i.e. A

Year	Cash flows	Cumulative Cash flows
0	-865	-865
1	850	-15
2	130	115
3	530	645
4	260	905
Payback period = 1 + 15/130 = 1.12 years i.e. C

Year	Cash flows	Cumulative Cash flows
0	-1095	-1095
1	980	-115
2	120	5
3	690	695
4	480	1175
Payback period = 1 + 115/120 = 1.96 years i.e. E