(i) Gap 1 more
Gap 2 inflation
(ii)????Year?????????????????????????? ???? Cash flow x DF????????????? ???????? Cumulative cashflow
????????? 0???????????????????????????????????????? -18,750???????????????????????????????????? -18,750
????????? 1?????????????????????????????? 5,000 x 0.926 = 4,630????????????????????? ? -14,120
????????? 2?????????????????????????????? 5,000 x 0.857 = 4,285????????????????????????-9,835
????????? 3?????????????????????????????? 5,000 x 0.794 = 3,970?????????????????????? ?-5,865
????????? 4?????????????????????????????? 5,000 x 0.735 = 3,675???????????????????? ???-2,190
????????? 5??????????????????????????????5,000 x 0.681 = 3,405???????????????????????? +1,215
As the cash flows arise at the end of the year payback will be 5 years Alternative working
The project will payback when $18,750 = $5,000 x AF @ 8%
AF(1-n)=3.75
The annuity factor for 4 years is 3.312, and 5 years is 3.993. Therefore the payback must occur at 5 years as the cash flows arise at the end of the year.