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Both payback periods, is project acceptable

Short answer

Simple payback period is 3.13 years, within the 4‑year limit, but the discounted payback at 10% is 4.14 years, exceeding the maximum allowed. The project is not acceptable on a time‑value basis.

Would the project be acceptable? Maximum desired payback period is 4 years. Decide from both types of payback period. MARR = 10%.

EOY012345
Net Cash Flow-50008001500250015101464

Maximum acceptable payback = 4 years; MARR = 10%.

 EOY :  0      1     2     3     4      5
 CF  : -5000  +800 +1500 +2500 +1510  +1464
EOYNet CFCumulative CFPW at 10%Cumulative PW
0-5,000-5,000-5,000.00-5,000.00
1800-4,200727.27-4,272.73
21,500-2,7001,239.67-3,033.06
32,500-2001,878.29-1,154.77
41,5101,3101,031.35-123.42
51,4642,774909.03785.61

Simple (conventional) payback period

Cumulative CF is −200 at the end of year 3 and +1,310 at year 4, so recovery occurs in year 4.

θ = 3 + 200 / 1,510 = 3.13 years (< 4 years)

Discounted payback period

Cumulative PW is −123.42 at the end of year 4 and +785.61 at year 5.

θ_d = 4 + 123.42 / 909.03 = 4.14 years (> 4 years)

Decision

MethodPaybackLimitResult
Simple3.13 yr4 yrAccept
Discounted4.14 yr4 yrReject

Answer: the simple payback accepts the project, but the discounted payback (which respects the time value of money at 10%) is 4.14 years, beyond the 4-year limit. The project is therefore not acceptable on a payback basis, although it is marginal (it still has PW = +Rs 785.61 over its 5 years).

✓ Answer checked by Claude Opus 5.5 (high effort)

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