Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $28,000; project Helium requires an initial outlay of $34,000.
Using the expected
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Expected cash inflows
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Year
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Hydrogen
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Helium
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1
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$6,500
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$8,000
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2
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$5,000
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$8,000
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3
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$8,500
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$7,000
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4
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$3,000
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$4,500
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5
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$3,500
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$5,000
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6
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$2,500
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$4,000
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calculate each project's payback period.
Which project meets Elysian's standards?
As the question is of payback period with uneven cash inflows, we will first calculate cumulative cash flows for both the projects and then the year in which we are fully recovering our cash outlay will be taken as the current year. Now, our cash outlay has been realized somewhere between the current year and the year preceding the current year, so we will use the following formula to calculate the exact payback period:
Pay back period = Last year with negative net cash flow + (Initial Investment - Cumulative cash inflow of last year) /Cash inflow of current year
Payback Period of Project Hydrogen
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Year
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Cash inflow | Cumulative Cash inflow |
| 1 |
$6,500
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$6,500 |
| 2 | $5,000 | $11,500 |
| 3 | $8,500 | $20,000 |
| 4 | $3,000 | $23,000 |
| 5 |
$3,500
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$26,500 |
| 6 |
$2,500
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$29,000 |
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