Question

Find the Payback period for the following project: Project Y Initial Outlay $18,900 Year 1 $5,610 Year 2 $5,620 Year 3 $5,860 Year 4 $6,970 The answer should be calculated to two decimal places.

Answer 1

Solution :

The payback period of Project Y = 3.26 Years

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

30.11.2019 - Microsoft Excel FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW B Statement showing calculation of Payback period of the project Y Sl.No. Particulars Year Project Cash Flows Cumulative cash flows 1 Cash Inflow Year 1 1 $ 5,610.00 $ 5,610.00 2 Cash Inflow Year 2 21 $ 5,620.00 $ 11,230.00 3 Cash Inflow Year 3 T 3 $ 5,860.00 $ 17,090.00 4 Cash Inflow Year 4 4 $ 6,970.00 $ 24,060.00 Payback Period: The Payback period lies between the year 3 & 4 as the initial Investment of $ 18,900 is earned during the year 4 Hence Payback period = 3 years +[($ 18,900 - $ 17,090) / $ 6,970 ] = 3 + [ 1,810 / 6,970 ) = 3 +0.2597 = 3.2597 years; = 3.26 years; ( when rounded off to two decimal places)