To calculate the payback period, we need to find the time that the project has recovered its initial

investment. After two years, the project has created:

$1,500 + 2,600 = $4,100

in cash flows. The project still needs to create another:

$4,800 – 4,100 = $700

in cash flows. During the third year, the cash flows from the project will be $3,400. So, the payback

period will be 2 years, plus what we still need to make divided by what we will make during the

third year. The payback period is:

Payback = 2 + ($700 / $2,900) = 2.24 years

investment. After two years, the project has created:

$1,500 + 2,600 = $4,100

in cash flows. The project still needs to create another:

$4,800 – 4,100 = $700

in cash flows. During the third year, the cash flows from the project will be $3,400. So, the payback

period will be 2 years, plus what we still need to make divided by what we will make during the

third year. The payback period is:

Payback = 2 + ($700 / $2,900) = 2.24 years

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