Consider the following three minus year project. the initial afterminustax outlay or afterminustax cost is $1,500,000. the future afterminustax cash inflows for years 1, 2, 3 and 4 are: $800,000, $800,000, $300,000 and $100,000, respectively. what is the payback period without discounting cash flows?

1.875 years

Explanation:

Payback period is a capital appraisal technique that allows to identify the time it takes to recover initial outlay of a project.

The Payback period for this period can be computed as,

Initial outlay = $1,500,000

First Subtract the first year cash flow to find residual out lay,

Year 0     =  (1,500,000)

Year 1      =  800,000        Residual Outlay  = (1500,000-800,000) = $700,000

Since year 2 cash flows are more than residual outlay, the payback period is,

Payback Period = 1 + (700,000/800,000) = 1.875 years

here "1" refers to year 1.

Hope that helps.

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