Solve the below given problem: Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.
- Solve the below given problem: Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.
Cash flows of A and B
| Year | Project A cash flows (Rs.) | Project B cash flows (Rs.) |
| 0 | (4,00,000) | (5,00,000) |
| 1 | 2,00,000 | 1,00,000 |
| 2 | 1,75,000 | 2,00,000 |
| 3 | 25,000 | 3,00,000 |
| 4 | 2,00,000 | 4,00,000 |
| 5 | 1,50,000 | 2,00,000 |
Solution for the problem
Problem:
| Solution
Table 8.6 shows the cash flows and the cumulative cash flows of the projects A and B. Table 8.6 Cash Flows and Cumulative Cash Flows of A and B |
||||||
| Year | Project A | Project B | ||||
| Cash flows
(Rs.) |
Cumulative Cash flows | Cash flows
(Rs.) |
Cumulative Cash flows | |||
| 1 | 2,00,000 | 2,00,000 | 1,00,000 | 1,00,000 | ||
| 2 | 1,75,000 | 3,75,000 | 2,00,000 | 3,00,000 | ||
| 3 | 25,000 | 4,00,000 | 3,00,000 | 6,00,000 | ||
| 4 | 2,00,000 | 6,00,000 | 4,00,000 | 10,00,000 | ||
| 5 | 1,50,000 | 7,50,000 | 2,00,000 | 12,00,000 | ||
From the cumulative cash flows column, project A recovers the initial cash outlay of Rs 4,00,000 at the end of the third year. Therefore, payback period of project A is 3 years.
From the cumulative cash flow column the initial cash outlay of Rs. 5,00,000 lies between 2nd year and 3rd year in case of project B.
Therefore, payback period for project B is:
2 + 5,00,000 – 3,00,000
3,00,000
= 2.67 years
Pay-back period for project B is 2.67 years
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