BUSF_A01.qxd

Payback period

Continuing to assess the investment opportunity in Example 4.1, page 84, the cash

flows for which were:

Year Zenith Super

££

0 (20,000) (25,000)

1 4,000 8,000

2 6,000 6,000

3 6,000 5,000

4 7,000 6,000

5 6,000 8,000

we should find that the anticipated payback periods would be 4 years (assuming that

the cash flows occur at year ends) or 3–^47 years (assuming that the cash flows occur

evenly over the year) for the Zenith, and 4 years for the Super.

The payback period(PBP) for the Zenith is represented in Figure 4.4.

Figure 4.4
Payback period for
the Zenith machine

The box on the left represents the size of the initial investment. The boxes on the right

represent the size of each year’s net cash inflows from the project. We can see that the

total of the inflows will equal the initial investment at some point between the beginning

and end of the fourth year.

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