3.54 years
Answer and Explanation: The payback period for the following set of cash flows is 3.54 years. Computation: Payback period = Years before the recovery of investment + (Unrecovered cost / Cash flow of that year )

What does a negative payback period mean?

The length of time necessary for a payback period on an investment is something to strongly consider before embarking upon a project – because the longer this period happens to be, the longer this money is “lost” and the more it negatively it affects cash flow until the project breaks even, or begins to turn a profit.

What is the payback period quizlet?

The payback period is best defined as: The time it takes to receive cash flows sufficient to cover your initial investment. It doesn’t consider cash flows after the payback period and it ignores the cost of money.

What is the ideal payback period?

The payback period disregards the time value of money. It is determined by counting the number of years it takes to recover the funds invested. For example, if it takes five years to recover the cost of an investment, the payback period is five years. Some analysts favor the payback method for its simplicity.

Which is longer the payback period or the maximum?

The payback period for this project is 3.375 years which is longer than the maximum desired payback period of the management (3 years). The investment in this project is therefore not desirable.

What happens to cash flows after the payback period?

It does not take into account, the cash flows that occur after the payback period. This means that a project having very good cash inflows but beyond its payback period may be ignored.

Why do you need a payback period formula?

The Payback Period formula is a tool that can be incredibly useful for companies in projecting the financial risk of a project. In examining the results, you should be looking for the shortest possible payback period. Because then, you can start making money beyond your investment.

How is the pay back period of an investment calculated?

It is also called payout or pay off period. It calculates the period of return back of investment. Pay back period is the time period required to recover the investment made in a project. Thus, PBPmeasures the number of years to pay back the original outlay from cash inflows generated by an investment proposal. Calculation Of Pay Back Period (PBP)