Question

Using a conservative end of period cash flow approach when applying the conventional payback method, what is the payback period when the upfront investment is 124,000 and the end of period cash flow is 25,000?

Answer 1

5 years

Step-by-step explanation:

According to the conservative end of period cash flow approach, cash flow is only computed at the end of the period. Therefore, the payback occurs at the year when the balance ceases to be negative. With constant cash flows of $25,000:

`Initial\ \ \ \ \ \ \ \ \ \ \ \ -\$124,000\\End\ of\ year\ 1\ -\$99,000\\End\ of\ year\ 2\ -\$74,000\\End\ of\ year\ 3\ -\$49,000\\End\ of\ year\ 4\ -\$24,000\\End\ of\ year\ 5\ \ \ \ \ \$1,000`

The payback period is 5 years.