An investment project provides cash inflows of $705 per year for eight years. Wh

Question

An investment project provides cash inflows of $705 per year for eight years. What is the project payback period if the initial cost is $1,900? What if the initial cost is $3,700? What if it is $5,700?

What is the project payback period if the initial cost is $1,900? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the project payback period if the initial cost is $3,700? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the project payback period if the initial cost is $5,700? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

An investment project provides cash inflows of $705 per year for eight years. What is the project payback period if the initial cost is $1,900? What if the initial cost is $3,700? What if it is $5,700?

Explanation / Answer

Formula for calculating payback period of project with uniform annual cash flows is:

Payback Period = Project Cost / Annual Cash Inflow

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SOLUTION FOR PART A:

Initial cost = $1,900

Annual Cash Inflow = $705

Payback period = $1,900 / $705

= 2.70 years

Hence, payback period in first scenario is 2.70 years

.

SOLUTION FOR PART B:

Initial cost = $3,700

Annual Cash Inflow = $705

Payback period = $3,700 / $705

= 5.25 years

Hence, payback period in second scenario is 5.25 years

.

SOLUTION FOR PART C:

Initial cost = $5,700

Annual Cash Inflow = $705

Payback period = $5,700 / $705

= 8.09 years

Hence, payback period in third scenario is 8.09 years. It is quite clear in this situation that payback period is exceeding the life of project. Therefore, project cost would not be recovered in this case.

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