Question

The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?

Answer 1

The Payback Period from non discounted cash flows is 2 Years and 8 months

Explanation:

With an initial outlay of $1,000,000

and Cash inflows for 4 years consecutively of $500,000 + $300,000 + $300,000 + $300,000

Pay back Period = the Period where Initial Outlay minus Cash Inflows equal Zero

= 1,000,000 - 500,000 (yr 1) - 300,000 (yr 2) - 200,000 (2/3 of Year 3) = 0

Pay back Period therefore is equal to 2 years & 8 months.