What is the payback period for the set of cash flows given below? Year 0 Cash Fl

ID: 2584523 • Letter: W

Question

What is the payback period for the set of cash flows given below? Year 0 Cash Flow $-6,400 1,600 1,900 2,300 1,400 2 4 An investment project has annual cash inflows of $4,200, $5,300, 6,100 and $7,400 and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $7,000? What is the discounted payback period for these cash flows if the initial cost is $10,000? What is the discounted payback period for these cash flows if the initial cost is $13,000? Do not round intermediate calculations and round your final answer to 2 decimal places.

Explanation / Answer

These are two different questions.

I am solving First Question as per the Chegg Policy..

Question 1 ---

Calculation of Payback Period

Payback Period

Payback period is the length of time within which initial investment is recovered back to the company.

It is a technique of evaluating investment. It does not consider time value of money.

Payback Period in cash of uniform cash flow = Initial Investment / Uniform Annual Cash Flow

In case of different Cash Flow each year, we need to calculate the Cumulative Value of Cash Flow to calculate payback period

Calculation of Cumulative Cash Flow

Year

Cash Inflow

Cumulative Cash Inflow

$1,600

$1,900

$3,500

$2,300

$5,800

$1,400

$7,200

Initial Investment = $6,400

From the above table, it is clear that the initial investment is recovered to the company between Year 3 and Year 4. It means Payback Period is between Year 3 and Year 4.

Payback Period = 3 Years + Balance Amount needed / (Cash Inflow for higher Year)

= 3 Years + (6,400 – 5,800) / 1400

= 3 Years + 600 / 1400

= 3 years + 0.4285 years

= 3.4285 years

Payback Period is 3.4285 Years