A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Year 1 $ 6,500Year 2 12,700Year 3 15,000Year 4 12,800Compute the project's payback period.
What will be an ideal response?
Year | Net Cash Flow | Cumulative Cash Flow |
| 0 | $(40,000) | $(40,000) |
| 1 | 6,500 | (33,500) |
| 2 | 12,700 | (20,800) |
| 3 | 15,000 | (5,800) |
| 4 | 12,800 | 7,000 |
Payback period = 3 years + (5,800/12,800) = 3.45 years
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