Payback period calculation?

Hi guys,

I’m using the Schewer 2016 level 1 book for corp fin. I’m studying payback periods (PBPs) on p. 8 of book 4, but am having some issues with the PMP example.

Project A

Year 0 1 2 3 4

Net CF -2000 1000 800 600 200

Cumulative NCF -2000 -1000 -200 400 600

PBP = 2 + (200/600) = 2.33

200 in PBP calculation comes from Net CF year 4, 600 from cumulative NCF year 4.

So where are the numbers in the PBP calculation in project B coming from?

Project B

Year 0 1 2 3 4

NCF -2000 200 600 800 1200

Cumulative NCF -2000 -1800 -1200 -400 800

PBP = 3 + (400/1200) = 3.33

I initially wrote my equation as: 3 + (1200/800)

you paid 2000 initially.

by year 3 you have recovered 200+600+800=1600

you need 400 more

so 3 + 400/1200 = 3.33 (the 1200 in the denominator is how much you received in next year which is where you are breaking even)

===============

1st problem

1800 by year 2, need 200

so 2 + 200/600 (the 600 in the denominator is how much you received in next year which is where you are breaking even)