What is the payback period for the following set of cash flows? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the payback period for the following set of cash flows? (Round your answer to 2 decimal places. (e.g., 32.16))

Year	Cash Flow
0	–$	5,600
1		1,325
2		1,525
3		1,925
4		1,425

Payback period

years

Explanation:

To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created:

$1,325 + 1,525 + 1,925 = $4,775

in cash flows. The project still needs to create another:

$5,600 – 4,775 = $825

in cash flows. During the fourth year, the cash flows from the project will be $1,425. So, the payback period will be three years, plus what we still need to make divided by what we will make during the fourth year. The payback period is:

Payback = 3 + ($825 / $1,425) = 3.58 years