1) An investment project provides cash inflows of $675 per year for eight years.

Question

1) An investment project provides cash inflows of $675 per year for eight years. What is the project payback period if the initial cost is $1,850? What if the initial cost is $3,600? What if it is $5,500?

What is the project payback period if the initial cost is $1,850? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the project payback period if the initial cost is $3,600? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the project payback period if the initial cost is $5,500? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

2)

1) An investment project provides cash inflows of $675 per year for eight years. What is the project payback period if the initial cost is $1,850? What if the initial cost is $3,600? What if it is $5,500?

Explanation / Answer

To calculate the payback period, we need to find the time that the project has recovered its initial

investment. The cash flows in this problem are an annuity, so the calculation is simpler. If the initial

cost is $3,000, the payback period is:

Payback = 3 + ($420 / $860) = 3.49 years

There is a shortcut to calculate the future cash flows are an annuity. Just divide the initial cost by the

annual cash flow. For the $3,000 cost, the payback period is:

Payback = $3,000 / $860 = 3.49 years

For an initial cost of $5,000, the payback period is:

Payback = $5,000 / $860 = 5.81 years

The payback period for an initial cost of $7,000 is a little trickier. Notice that the total cash inflows

after eight years will be:

Total cash inflows = 8($860) = $6,880

If the initial cost is $7,000, the project never pays back. Notice that if you use the shortcut for

annuity cash flows, you get:

Payback = $7,000 / $860 = 8.14 years.

This answer does not make sense since the cash flows stop after eight years, so again, we must

conclude the payback period is never.

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