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Payback period to recommend best of A, B, C

Short answer

Cumulative cash flows give payback: A =2.29 years, B = 2.86, C = 2.36. Project A has the shoretest payback; recommend A.

Recommend the best using payback period for the following projects. (End of year cash flows in Rs. '000.)

Project0123456
A-640262290302310310260
B-680-40392380380380380
C-755205406400390390324

Payback period is the time needed for the cumulative net cash flow to become zero (simple payback, no discounting). The project with the shortest payback is preferred. (Figures in Rs '000.)

Cumulative cash flow

Project0123456
A-640-378-882145248341094
B-680-720-328524328121192
C-755-550-14425664610361360

Payback calculation

A: cumulative = −88 at end of yr 2; yr 3 inflow = 302
   Payback = 2 + 88/302 = 2.29 years
B: cumulative = −720 (yr 1, because of the extra −40) and −328 at end of yr 2; yr 3 inflow = 380
   Payback = 2 + 328/380 = 2.86 years
C: cumulative = −144 at end of yr 2; yr 3 inflow = 400
   Payback = 2 + 144/400 = 2.36 years
ProjectPayback (years)
A2.29
B2.86
C2.36

Answer: Recommend project A, with the shortest payback of 2.29 years. Payback ignores cash flows after recovery and the time value of money (C earns the larger total returns and a higher PW), so the result should be confirmed with an NPW or ERR analysis before the final choice.

✓ Answer checked by Claude Opus 5.5 (high effort)

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