Discounting Pay Back Period: Further Consideration – Payback in Years and months


Mustapha is evaluating an investment of $5m into a project that promises the following cash inflows
Year 1 $1850000
Year 2 $1650000
Year 3 $1400000
Year 4 $980000
Year 5 $720000
Year 6 $520000
If Mustapha expects a rate of return of 11% per annum, determine the payback period of the investment.
Suggested solution 

From the table above, we see that the inflow of year5 is more than the balance remaining to payback fully the capital outlay as at year4. All we need to get is the time when the balance is nil. To get this we need to prorate the balance in year5 to get the point where the balance ought to be zero. This we do as follows:


As can be seen in the table above, the project will payback fully after 5 years and 9 months.

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