Question

Year Cash Flow 0 –$5,500 1 1,300 2 1,500 3 1,900 4 1,400 What is the payback period for the set of cash flows given above?

Answer 1

Answer: 3.57 years

Explanation:

Payback period is the amount of time it would take for a project to pay back its initial investment.

Investment = $5,500

Year 1 + 2 + 3 = 1,300 + 1,500 + 1,900 = $4,700

With cash flow of $1,400 coming in fourth year and $800 remaining for payback, investment will be paid back in fourth year.

Payback period = Year before payback + Amount left/ Cashflow in year of payback

= 3 + (5,500 - 4,700) / 1,400

= 3.57 years