**Project Payback Period Calculation**You are considering a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? Show all calculations.**Calculations:**1. **Initial Investment:** $7,8002. **Year 1 Cash Inflow:** $1,100 - Remaining Balance: $7,800 - $1,100 = $6,700 3. **Year 2 Cash Inflow:** $1,640 - Remaining Balance: $6,700 - $1,640 = $5,0604. **Year 3 Cash Inflow:** $3,800 - Remaining Balance: $5,060 - $3,800 = $1,2605. **Year 4 Cash Inflow:** $4,500 - By the end of Year 4, the project will fully repay the initial investment. - Amount surplus after repayment: $4,500 - $1,260 = $3,240**Payback Period:**The project reaches its payback period within the fourth year. Based on the cumulative cash inflow analysis, the payback period is approximately 3.28 years (3 full years + partial recovery in the fourth year).

A shorter payback period denotes a quicker return of capital and lower financial risk, the payback…

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You are considering a project with an initial cost of $7,800. What is the payback the next the cash inflows are $1 100 $1 640 $3,800 and $4.500 a year rash over the

FINANCIAL ACCOUNTING

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ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

**Project Payback Period Calculation**

You are considering a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? Show all calculations.

**Calculations:**

1. **Initial Investment:** $7,800

2. **Year 1 Cash Inflow:** $1,100
- Remaining Balance: $7,800 - $1,100 = $6,700

3. **Year 2 Cash Inflow:** $1,640
- Remaining Balance: $6,700 - $1,640 = $5,060

4. **Year 3 Cash Inflow:** $3,800
- Remaining Balance: $5,060 - $3,800 = $1,260

5. **Year 4 Cash Inflow:** $4,500
- By the end of Year 4, the project will fully repay the initial investment.
- Amount surplus after repayment: $4,500 - $1,260 = $3,240

**Payback Period:**

The project reaches its payback period within the fourth year. Based on the cumulative cash inflow analysis, the payback period is approximately 3.28 years (3 full years + partial recovery in the fourth year).

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