Question 4 Not yel answered Marked out of 2.00 P Flag questionT Given the follow

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Question 4 Not yel answered Marked out of 2.00 P Flag questionT Given the following Conventional Payback Period Analysis (It has been done for you). Answer the following questions: The poject "breaks even, between the years 3-4 r the $20,000 shown in year "or is a salvage value that was used in a previous Payback Calcutation. a Choose appropnate to use it again Payback Period Cash Flow Cum. Flow 0 1 2 3 4 5 6 -$105,000+$20,000 $15,000 $25,000 $35,000 $45,000 $45,000 $35,000 -$85,000 -$70,000 -$45,000 -$10,000 $35,000 $80,000 $115,000 Next

Explanation / Answer

Dear Friend,

Payback Period is time within which the Initial Investment is expected to be recovered by the company from the cash inflows generated by that investment.

In case of even Cash flows, the formula for Payback period = Initial Investment / Cash Inflow per period.

But, in the given case, we have uneven Cash flows, in such a case, we need to calculate the cumulative net cash flow for each period and apply the following formulae.

Payback Period = A + (B/C)

where as, A = Last year with negative Cumulative Cashflow

B = actual value of cumulative cash flow at end of period A

C = Total Cash flow during period after A

Now, Payback period = 3 + (10,000/45,000)

= 3 + 0.22

= 3.22 Years

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