Question

What is the payback period of the following assuming that there's no time value of money! (i.e., 0% interest rate). Cashflow: Period Cash flow -300,000 50,000 58,000 43,000 39,000 38,000 42,000 40,000 38,500 Probable responses to the problem: 6.50 b) 6.25 6.00 6.75 None of the above

Answer 1

Payback period for uneven cash flows :

Payback Period =	A +	B
		C

Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and
C is the total cash inflow during the period following period A

The following table shows the calculations :

Year	Cash Flow	Cumulative Cash Flow
0	-300000	-300000
1	50000	-250000
2	58000	-192000
3	43000	-149000
4	39000	-110000
5	38000	-72000
6	42000	-30000
7	40000	10000
8	38500	48500

So, payback period

= 6 + |-30,000| / 40,000

= 6 + 0.75

= 6.75 Years

So, as per above calculations, option d is the correct option