Answer: 2.74 years
Explanation:
Payback Period is a method of capital budgeting that works by checking how long the project will take to repay the investment outlay.
The formula is;
Payback Period = Year before Payback Period occurs + [tex]\frac{Cash remaining}{Cashflow in year payback happens}[/tex]
Initial Outlay = $4,650
First Year = $1,350
Second Year = $2,450
Third Year = $1,150
First year + second year = 1,350 + 2,450 = $3,800
Remaining till repayment = 4,650 - 3,800 = $850
Third year amount of $1,150 is higher than $850 so amount will be repaid in 3rd year.
Payback Period = Year before Payback Period occurs + [tex]\frac{Cash remaining}{Cashflow in year payback happens}[/tex]
Payback Period = 2 + [tex]\frac{850}{1,150}[/tex]
Payback Period = 2.74 years
