Question

Blue Spruce Inc. is contemplating a capital investment of $108000. The cash flows over the project’s four years are:

Expected Annual	Expected Annual
Year	Cash Inflows	Cash Outflows
1	$35000	$16000
2	65000	25000
3	75000	30000
4	65000	40000

The cash payback period is

3.56 years.

3.16 years.

2.18 years.

3.11 years.

Answer 1

Solution: 3.16 years
Working:
Net cashflow = Cash inflow - Cash outflow
Year 1 Net cashflow = $35,000 - $16,000 = $19,000
Year 2 Net cashflow = $65,000 - $25,000 = $40,000
Year 3 Net cashflow = $75,000 - $30,000 = $45,000
Year 4 Net cashflow = $65,000 - $40,000 = $25,000

Year   Cash flow   Cummulative cashflow     
0   -108,000   -108,000     
1   19,000   -89,000     
2   40,000   -49,000     
3   45,000   -4,000     
4   25,000   21,000     
Payback period = 3 years + 4000/25000 = 3.16 years