A project has estimated annual net cash flows of . It is estimated to cost .
Determine the cash payback period. Round your answer to one decimal place.
years

To determine the cash payback period, you divide the initial investment by the annual net cash flows.

Using the numbers provided:
Cash Payback Period = Initial Investment / Annual Net Cash Flows
Cash Payback Period = years.

So, the cash payback period is approximately 7.7 years.

When evaluating a project’s viability, it’s essential to consider not only the payback period but also the time value of money. While the payback period gives a quick insight into how long it takes to recover the initial investment, it doesn’t take into account cash flows that occur after the payback period. This is where metrics like Net Present Value (NPV) or Internal Rate of Return (IRR) become crucial for a comprehensive analysis.

When calculating the payback period, ensure that you are using net cash inflows rather than gross revenues. Also, keep in mind that if cash inflows fluctuate significantly year over year, the payback period could vary widely. It’s a good idea to use average cash flows or the most likely scenario when making this calculation to avoid potential overestimation or underestimation of recovery time.