Question

A company invests $40,000 in a project with the following net cash flows: Year 1: $3,000 Year 2: $8,000 Year 3: $14,000 Year 4: $19,000 Year 5: $22,000 Year 6: $28,000 In what year does payback occur

Answer 1

the payback period is 3.34 years

Step-by-step explanation:

The computation of the payback period is as follow;

Given that

Year Cash flows Cumulative cash flows

0 -$40,000 $-40,000

1 $3,000 $3,000

2 $8,000 $11,000

3 $14,000 $25,000

4 $19,000 $44,000

5 $22,000 $66,000

6 $28,000 $94,000

Now the payback period is

= 3 years + ($40,000 - $25,000) ÷ $44,000

= 3 years + 0.34

= 3.34 years

Hence, the payback period is 3.34 years