A project needs an initial investment of $200,000. It is expected to generate cash inflows of $60,000 in year 1, $80,000 in year 2, $90,000 in year 3, and $100,000 in year 4. Using simple (undiscounted) cash flows, what is the payback period?

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Accepted Answer

2.67 years. Cumulative inflows: year 1 = 60,000; year 2 = 140,000; year 3 = 230,000. The $200,000 is recovered during year 3. After year 2, $60,000 remains (200,000 − 140,000); divided by year-3 inflow of $90,000 = 0.67 year. Payback = 2 + 0.67 = 2.67 years.

A project needs an initial investment of $200,000. It is expected to generate cash inflows of $60,000 in year 1, $80,000 in year 2, $90,000 in year 3, and $100,000 in year 4. Using simple (undiscounted) cash flows, what is the payback period?

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