Guerilla Radio Broadcasting has a project available with the

Guerilla Radio Broadcasting has a project available with the following cash flows: Year 0 Cash Flow -$16,300 6,700 8,000 3,900 3,500 2 3 4 What is the payback period? O 2.68 years O 2.41 years O 3.00 years O 1.59 years O 2.81 years

Solution

Payback period is the time taken by the cash inflows to re-earn the invested amount.

Cumulative cash flow for year 1 and year 2 = 6,700 + 8,000 = 14,700

This means, you just need 16,300 - 14,700 = 1,600 more to re-earn invested amount of $16,300.

But cash flow in year 3 is 3900, more than what we require.

So fraction of year to earn $1600 = 1600/3900 = 0.41 year

Hence payback = 2 + 0.41 years = 2.41 years --> Answer