Traditional Pay Back Period: Question2 – Payback in Years and months


Assuming $1m is invested to yield the following cash inflows:
Year1-$100000, Year2-$200000, Year3-$600000, Year4-$400000 and Year5-$150000
How long will it take the project to payback?
Suggested Solution
To get the length of time (in years) it takes to payback this investment, we arrange the cash inflows in a tabular form in such a way that for every year, we get the balance outstanding after an inflow is received. This is demonstrated in the table below.

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

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