What is the payback period for the following set of cash flows? Year Cash Flow 0 −$ 4,800 ...

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Question

What is the payback period for the following set of cash flows?

business finance

Answer 1

Answer #1

Payback period is the number of years it takes to re-earn the invested amount.

Invested amount = $4,800

Cash flow in Year 1 = $1,600.

Cash flow in Year 2 = $2,200. Cumulative cash flow = $1,600 + $2,200 = $3,800

We need $1,000 more to complete payback, which is less than the cash flow in year 3.

Fraction of year 3 = $1,000/$1,400 = 0.71 year

Payback = 2 + 0.71 years = 2.71 years

Answer 2

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