Question

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

Answer 1

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