McKenna Sports Authority is getting ready to produce a new l

McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $837,500, and $1,215,000 over the next three years. What is the payback period for this project?

Solution

Payback period is the earliest time by which you recover all the costs..

Cash Flow after 3 years = - $1.85m + $525k + $837.5k + $1.215m = $727,500

Note that net CF is negative after the 1st two years..

Hence required payback time is 3 years.