Find the payback period for the following project:   Year Cost Initial Outlay $8,910 Year 1 $3,980 Year 2 $3,520 Year 3 $3,700 Year 4 $5,330 The answer should be calculated to two decimal places

The payback period is the number of years it'll take for your company to break even. In other words, the time it'll take to get back the total amount that was initially invested in the project your company decided to undertake. In our question, the initial amount spent is $8,910 and the total amount the investment yields over a four year period is $16,530 (that is $3,980 + $3,520 + $3,700 + $5,330). Therefore, at some point during the four-year period, the project is able to generate revenue to pay back its initial cost of $8,910.

A simple way to determine the period of time is to do a cumulative sum of cash flows over the four-year period till you get to the amount that was initially invested.

So in year one, you obtain $3,980.

By year 2, total cash flow will be year 1 revenue plus year 2 revenue which is $7,500 ($3,980 + $3,520).

By year 3, the cumulative cash flow will be $11,200. In other words, this is the cumulative revenue at end year 2 plus revenue in year 3 and this is already more than the initial investment.

Therefore the payback period is attained sometime during year three. At the end of year two, the project has recovered $7,500, so it needs to make an additional $1,410 ($8,910 - $7,500) for this project to break even. If we assume that the $3,700 made in year 3 is obtained evenly over the 12-month period, then every month in year 3 yields $308.33 and after 4.57 (1,410 / 308.33) months in year 3, the project would've reached the break even point. Therefore payback period is 2.45 years.