Question

Suppose a company has proposed a new 5-year project. The project has an initial outlay of $24,000 and has expected cash flows of $3,000 in year 1, $4,000 in year 2, $5,000 in year 3, $6,000 in year 4, and $7,000 in year 5. The required rate of return is 15% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(24000)	(24000)
1	3000	(21000)
2	4000	(17000)
3	5000	(12000)
4	6000	(6000)
5	7000	1000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=4+(6000/7000)

=4.9 years(Approx).