What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?

Question

Quizplus · Accepted Answer

To calculate payback period, we need to find out the time required to recover the initial investment. 
Year 1 cash flow = $1,800,000
Year 2 cash flow = $1,900,000
Year 3 cash flow = $700,000
Year 4 cash flow = $1,800,000
Total cash flow for first 2 years = $1,800,000 + $1,900,000 = $3,700,000
Remaining cash flow to recover initial investment = $5,000,000 - $3,700,000 = $1,300,000
Payback period = 2 + ($1,300,000/$700,000) = 3.33 years
Therefore, the best choice is B.

What Is the Payback Period for Sweetbay Supermarket's New Project