Your project has the following cash flows Year Cash Flow 0

Your project has the following cash flows:

Year   Cash Flow

0         - $4,400

1        1,500

2          2,400

3        1,200

4         2,600

What is the payback period for this project?

Solution

Payback period

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

Project

Cash Flow

year

0

1

2

3

4

Cash Flow

-$4,400

$1,500

$2,400

$1,200

$2,600

Investor invest $4,400 and get $1,500 in first year, $2,400 in second year. So total cash inflow in two year is $3,900 and his investment is $4,400. So the payback period will be more than 2 year.

In third year investor receive $1,200. So total cash inflow in three year is $5,100 and his investment is $4,400. SO payback period will be less than 3 year.

So payback period for investor = 2 year + (4,400 - $3,900) / $1,200

                                                   = 2 year + 0.42 year

                                                    = 2.42 year

Hence, payback period for investor is 2.42 year.