Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company’s management expects the machinery to produce cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years, respectively. What is the payback period?

2.13 years  

Explanation:

The payback period is the time taken for the net inflows from a project to equal the amount invested into that project.

Year                           Outflow/inflow                  Balance

0                                  ($3,768,966)                  ($3,768,966)

1                                    $979,225                       ($2,789,741 )

2                                   $1,158,886                      ($1,630,855 )

3                                    $1,881,497                       250,642

Additional period = 250,642 /1,881,497 = 0.13

Payback period = 2.13 years  

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