Glennard M.

Alcovendas
BSA-A2C

Self-Study Practice 2: Computing Payback Period

Suppose that a new car wash facility requires an investment of P100,000 and either has
(a) even cash flows of P50,000 per year or
(b) the following expected annual cash flows: P30,000, P40,000, P50,000, P60,000, and
P70,000.
Required:
Calculate the payback period for each case.
Show your computations.

a. Payback Period= Initial Investment/ Annual Cash Flow

= P 100,000 / 50,000
Payback Period= 2 years

b.

Year Annual Cash Flow Cumulative Cash Flow

0 100,000 100,000

1 30,000 70,000

2 40,000 30,000

3 50,000 20,000

4 60,000 80,000

5 70,000 150,000

Payback Period= 2 + (30,000/50,000)

= 2+ 0.6
Payback period= 2.6 years