Question

Mr. Aslam is considering investing in a poultry farm. The project will require an initial investment of $ 250000 and is expected to generate the following cash flows thereafter

year $

1 (50000)

2 80000

3 130000

4 110000

5 (100000)

6 160000

7 200000

Required. Calculate the payback period and comment on your answer

Answer 1

The cumulative cash flows from investment exceed the initial investment of $250 000 in the year 4(year A).

$payback period=(A-1)+[(cost-cumulative cash flow ^{A-1})÷cashflow^A]$

$=3+[(250 000-160 000)÷110000]=3.82years$

The initial investment in poultry farm will be recovered in approximately 4 years which seems to be a desirable payback duration for this type of investment.