Question

In: Finance

There is a project with the following cash flows : Year Cash Flow 0 −$23,700 1...

There is a project with the following cash flows :

Year Cash Flow
0 −$23,700
1 7,000
2 7,700
3 7,100
4 5,100


What is the payback period?

Multiple Choice

  • 2.73 years

  • 4.00 years

  • 3.81 years

  • 3.63 years

  • 3.37 years

Solutions

Expert Solution

Year 0 1 2 3 4
Cashflow(in $)             (23,700)                 7,000                       7,700                   7,100 5100
Cumulative Cashflow(in $)             (23,700)            (16,700)                     (9,000)                 (1,900)                   3,200

Payback Period = A+(B/C)

where

A - last period containing negative cumulative cash flow = 3

B - absolute value of cumulative cash flow in A = 1900

C - cash flow during the period after A = 5100

Payback Period = 3+(1900/5100)

= 3.37 years


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