Example of Payback Period Method

Suppose a project costs Sh.80,000 and will produce the following cash inflows as:

                                 Cash inflows      Accumulated inflows

Inflows year 1 =          10,000               10,000

Inflows year 2 =          30,000               40,000

Inflows year 3 =          15,000               55,000

Inflows year 4 =          20,000               75,000

Inflows year 5 =          30,000               105,000

The Sh.80, 000 costs is recovered between year 4 and 5. Throughout year 5 (after year 4) Sh.5, 000 is (80,000 - 75,000) is required out the total year 5 cash flows of 30,000

Hence the PBP = 4yrs+ (5,000/30,000)                                              

= 4.17 years