Year Cash Flow(A) Cash Flow (B)
0 -307,206 -27,651
1 14,950 8,726
2 32,391 13,901
3 29,232 9,222
4 390,590 13,140
15% rate of return.
what is the payback period for Period A and B.
To calculate the payback period, we need to determine how long it takes to recover the initial investment. In this case, the initial investment is the negative cash flow in Year 0.
For Period A:
1. Sum up the cash flows until they become positive.
- Start with the initial cash flow in Year 0: -307,206.
- Add the cash flow in Year 1: 14,950.
- Add the cash flow in Year 2: 32,391.
- Add the cash flow in Year 3: 29,232.
- Add the cash flow in Year 4: 390,590.
2. Determine the year when the cumulative cash flow becomes positive.
- Year 0: -307,206.
- Year 1: -307,206 + 14,950 = -292,256.
- Year 2: -292,256 + 32,391 = -259,865.
- Year 3: -259,865 + 29,232 = -230,633.
- Year 4: -230,633 + 390,590 = 159,957.
Based on the calculations, the cumulative cash flow becomes positive in Year 4.
Therefore, the payback period for Period A is 4 years.
For Period B:
Perform the same steps as above using the cash flows for Period B.
1. Sum up the cash flows until they become positive.
- Year 0: -27,651.
- Year 1: -27,651 + 8,726 = -18,925.
- Year 2: -18,925 + 13,901 = -5,024.
- Year 3: -5,024 + 9,222 = 4,198.
- Year 4: 4,198 + 13,140 = 17,338.
2. Determine the year when the cumulative cash flow becomes positive.
- Year 0: -27,651.
- Year 1: -27,651 + 8,726 = -18,925.
- Year 2: -18,925 + 13,901 = -5,024.
- Year 3: -5,024 + 9,222 = 4,198.
- Year 4: 4,198 + 13,140 = 17,338.
Based on the calculations, the cumulative cash flow becomes positive in Year 4.
Therefore, the payback period for Period B is 4 years.
Both periods have the same payback period of 4 years.