How to calculate payback period with uneven cash flows?
Understand the Problem
The question is asking for a method to calculate the payback period when cash flows are not consistent from one period to another. This requires understanding how to aggregate cash flows over time until the initial investment is recovered, taking into account the varying amounts received in each period.
Answer
Payback Period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year
The final answer is Payback Period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year
Answer for screen readers
The final answer is Payback Period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year
More Information
When cash flows are uneven, the payback period calculation requires summing the cash flows until the initial investment is covered. The accuracy of this method is important for reliable investment decision-making.
Tips
One common mistake is not correctly summing the cumulative cash flows each year or miscalculating the fraction of the year needed for recovery.
Sources
- Payback Period Calculation: Even and Uneven Cash Flows - cleartax.in
- Exercise-8: Payback period with uneven cash flows - accountingformanagement.org
- Payback Period with Uneven Cash Flows - linkedin.com
