6. The payback period

The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions.

Consider the case of Blue Hamster Manufacturing Inc.:

Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Deltas expected future cash flows. To answer this question, Blue Hamsters CFO has asked that you compute the projects payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year.

Complete the following table and compute the projects conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)

	Year 0	Year 1	Year 2	Year 3
Expected cash flow	-$6,000,000	$2,400,000	$5,100,000	$2,100,000
Cumulative cash flow	$	$	$	$
Conventional payback period:	years