Question

Given the following cash flows, what is the project's payback for an initial investment of $100,000?

Year 1 - $25,000

Year 2 - $40,000

Year 3 - $45,000

Year 4 - $50,000

a. 2.8 years

b. 2 years

c. Answer cannot be determined.

d. 4 years

Answer 1

Correct answer-----------(a) 2.8 years

Working

Year	Net Cash Flow	Cummulative Cash Flow
0	$   (100,000.00)	$   (100,000.00)
1	$      25,000.00	$     (75,000.00)
2	$      40,000.00	$     (35,000.00)
3	$      45,000.00	$      10,000.00
4	$      50,000.00	$      60,000.00

.

Payback Period =	A+	B
		C

.

In the above formula,

A is the last period with a negative cumulative cash flow;

B is the absolute value of cumulative cash flow at the end of the period A;

C is the total cash flow during the period after A

.

Payback Period =	2+	$         35,000.00	0.8
		$         45,000.00
Payback Period =	2.8	years