## Sunday, 3 August 2014

### Problem 8-1 Calculating Payback [LO 1] Consider the following cash flows: Year Cash Flow 0 –\$6,800 1 1,950 2 4,100 3 1,750 4 1,450

Problem 8-1 Calculating Payback [LO 1]
 Consider the following cash flows:

 Year Cash Flow 0 –\$6,800 1 1,950 2 4,100 3 1,750 4 1,450

 Required: What is the payback period for the above set of cash flows? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

 Payback period years

Explanation:
 To calculate the payback period, we need to find the time the project needs to recover its initial investment. After two years, the project has created: \$1,950 + 4,100 = \$6,050 in cash flows. The project still needs to create another: \$6,800 – 6,050 = \$750 in cash flows. During the third year, the cash flows from the project will be \$1,750. So, the payback period will be 2 years, plus what we still need to make divided by what we will make during the third year. The payback period is: Payback = 2 + (\$750 / \$1,750) Payback = 2.43 years