Calculate the Pay-off Period for an IS project that has a $200,000 development cost in year...

Calculate the Pay-off Period for an IS project that has a $200,000 development cost in year 1 and annual $40,000 maintenance costs from year 2 onwards. The benefits are expected to be $100,000 in Year 2 and growing $25,000 a year as adoption of the system increases. The discount rate is 0%.

Expert Solution

Calculation of pay-off period for an IS project

Explaination- As the project life is not given in the problem it is assumed that it has unlimited usual life and below is only an extract of project cashflows till 5 years to calculate the pay-off period. Further as discount rate is 0% we have not calculated discounted payback period.
Year	Benefits (a)	Maintenance costs (b)	Cahflows (a-b)	Cumulative cashflows
1			-200000	-200000
2	100000	40000	60000	-140000
3	125000	40000	85000	-55000
4	150000	40000	110000	55000
5	175000	40000	135000	190000
and so on

Pay-off period= A+ (B/C)

where,
A= last period number with negative cumulative cashflows
B= absolute value of cumulative net cashflow at the end of period A
C= total cash inflow during the period following period A

Pay-off period= 3+(55000/110000)
		3.5 years

jeff jeffy answered 1 year ago

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