I calculated the following cash flows for the 5 year project. Can somone help me find the payback period??
year 0 = -80000
year 1= -75000
year2= 105000
year3= 115000
year4=115000
year5=115000
To find the payback period, you need to determine how long it takes for the initial investment to be recovered (i.e., when the cumulative cash inflows are equal to or greater than the initial investment). Here's how you can calculate the payback period for the given cash flows:
1. Subtract the cash outflows (negative values) from the cash inflows (positive values) for each year to get the net cash flow for each year.
Year 0: -80,000
Year 1: -75,000
Year 2: 105,000
Year 3: 115,000
Year 4: 115,000
Year 5: 115,000
2. Calculate the cumulative cash flow for each year by adding the net cash flow of the current year to the cumulative cash flow of the previous year.
Cumulative cash flow:
Year 0: -80,000
Year 1: -155,000 (-80,000 - 75,000)
Year 2: -50,000 (-155,000 + 105,000)
Year 3: 65,000 (-50,000 + 115,000)
Year 4: 180,000 (65,000 + 115,000)
Year 5: 295,000 (180,000 + 115,000)
3. Identify the year when the cumulative cash flow becomes positive or equal to zero (indicating the recovery of the initial investment).
In this case, Year 3 is the first year when the cumulative cash flow becomes positive. Therefore, the payback period for this project is 3 years.
Please note that the payback period is a simple measure that does not consider the timing and value of cash flows beyond the payback period. It is often used as an initial screening tool but may not provide a comprehensive analysis of the project's profitability.