Example Exercise 262 A project has estimated annual net cash

Example Exercise 26-2 A project has estimated annual net cash flows of $95,200. It is estimated to cost $580,720. Determine the cash payback period. Round to one decimal place.

Solution

Estimated Annual Net Cash flow = $95,200;

Estimated Cost = $580,720.

Cash Payback Period = Estimated Cost / Estimated Annual Net Cash flow

= $580,720 / $95,200

= 6.1 years.

Therefore, the cash payback period for the given project is 6.1 years. That is within 6.1 years the company can recover the cost invested in the project from the cash flows generated by the project.

But it might not be appropriate when the price level decreases, in that case we need to use Discounted payback period.

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Hope this is helpful!!