Question
The director of A B C Itd. is considering an investment in a new project that has an estima years and requires £ 10,000 in initial cost. The table below shows the estimated cashflows from the project during its life: Year & Cash flows (£) 1 & 3,000 2 & 4,000 3 & 3,000 4 & 6,000 5 & 8,000 What is the payback period from the project?
Answer
4.4
(308 Votes)
Abigail
Master · Tutor for 5 years
Answer
The payback period for the project is 3 years.
Explanation
## Step1: The payback period is a standard method for evaluating potential investment options by calculating the time it takes to earn back the initial investment. The initial investment in this context is £10,000.## Step2: We then need to evaluate the estimated cashflows from the project. The cashflows given are: £3,000 in the first year, £4,000 in the second, £3,000 in the third, £6,000 in the fourth, and £8,000 in the fifth year. ## Step3: We begin by adding up the yearly cashflows and continue to do so until we reach or exceed the initial investment (£10,000). In year one, the sum is £3,000, then at the end of the second year it's £7,000 (3,000+4,000), and finally by the end of the third year we reach £10,000 (7,000+3,000). Therefore, the payback period is within the end of three years.### The formula used is: Initial investment/original cash inflow per period