Final answer:
The payback period for Belgravia Petroleum Inc.'s project is determined by cumulatively adding the yearly cash flows until they offset the initial investment of $300,000,000. No discounting is necessary when determining the simple payback period.
Step-by-step explanation:
To calculate the payback period for Belgravia Petroleum Inc.'s generation project, one would need to construct a spreadsheet and aggregate the cash flows until the initial investment is recovered. The cash flows provided are:
- Year 0: -$300,000,000 (initial investment)
- Year 1: $63,000,000
- Year 2: $85,000,000
- Year 3: $50,000,000
- Year 4: $145,000,000
- Year 5: $175,000,000
- Year 6: $50,000,000
- Year 7: $70,000,000
- Year 8: $72,000,000
The cost of capital is 12% and is relevant if we were calculating the present value of future cash flows or net present value, but for simple payback period, we concern ourselves only with accumulating the cash inflows.
The payback period is the timeframe over which the sum of the net positive cash flows equals the initial investment. To identify this period, cash flows from Year 1 onwards are cumulatively added until they match or exceed the initial cash outflow of $300,000,000. The payback period is complete once this occurs. For precision, if the payback period falls between years, the exact time can be interpolated based on the cash flow distribution of those years.