Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find the point in time when the cumulative cash inflows equal the initial investment.

In year 1, the cash inflow is $110,000, so we subtract that from the initial investment of $450,000, leaving us with an outstanding balance of $340,000.

In year 2, the cash inflows are $180,000, bringing the cumulative cash inflows to $290,000 ($110,000 + $180,000). Subtracting this from the initial investment gives us an outstanding balance of $160,000.

In year 3, the cash inflows are $270,000, bringing the cumulative cash inflows to $560,000 ($110,000 + $180,000 + $270,000). Subtracting this from the initial investment gives us an outstanding balance of -$110,000, meaning the project has paid back in full at the end of year 3.

Therefore, the payback period is 3 years + $110,000 / $270,000 in year 3 = 3.407 years, or approximately 3.14 years rounded to two decimal places.

Stern Associates Is Considering a Project That Has the Following