What is the payback period for the following set of cash flows?
To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the project has created:
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in cash flows. The project still needs to create another:
$4,600 − 4,300 = $300
in cash flows. During the third year, the cash flows from the project will be $2,500. So, the payback period will be 2 years, plus what we still need to make divided by what we will make during the third year. The payback period is: