Blanchford Enterprises is considering a project that has the following

QUESTION

Blanchford Enterprises is considering a project that has the following cash flow data. What is the projects payback? Note that a projects projected IRR can be negative in which case it will be rejected.Cash flows:Year 0: -$9651:$4252:$3853:$3454:$3055:$265
Payback period means the number of years required before you earn your initial outflow (i.e. when it gets paid back). So for example your cashflows are: Year 0: -100 Year 1: 50 Year 2: 25 Year 3: 25 Year 4: 10 Your payback period is 3 years because 50 25 25 = 100 (which is your initial outlay). The question becomes harder if your payback period is not a whole number (like your question). Heres what you do: You know that the payback period is somewhere between year 2 and year 3. Thats because 425¦

385 = 810 and 425 385 345 = 1155 and your initial outflow of 965 lies between those two. So now you subtract 810 from 965 and you get 965-810 = 155. And you divide 155 by the third years cashflow which is 345, you get 155 / 345 = 0.45 years. So your payback period now is 2.45 years or about 2 years ,5 months and some number of days.

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