Question

A project has the following cash flows. What is the payback period?


Cash Flow
Year 0
−$45,000
Year 1
20,000
Year 2
23,500
Year 3
24,000
Year 4
25,000

Multiple Choice
a 

1.72 years

b 

1.83 years

c 

2.06 years

d 

2.33 years

e 

2.65 years

Answer 1

Year	Cash flows	Cumulative cash flows
0	(45,000)	(45,000)
1	20,000	(25,000)
2	23500	(1500)
3	24,000	22500
4	25,000	47,500

Payback period=last period with a negative cash flows+(cumulative cash flow till that period/cash flow occurring after that period)

=2+(1500/24,000)

=2.06 years (approx).