Question

You have the following information on a project's cash flows. Year Cash flows 0 -$108,000 1 33,000 2 33,000 3 38,000 4 92,000 5 55,000 The project's payback is ____ years. Round it to two decimal places. Your Answer:

Answer 1

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created:

$33,000 + $33,000 + $38,000 = $104,000

in cash flows. The project still needs to create another:

$108,000 - $104,000 = $4,000

in cash flows. During the fourth year, the cash flows from the project will be $7,700. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is:

Payback = 3 + ($4,000 / 92,000) = 3.04 years