Illustration 1 Bright Okoronwko runs a manufacturing business. The project involves an immediate cash outlay of ₦200,000. He estimated the net cash inflows from the projects to be as follows: Year ₦ 1 20,000 2 60,000 3 180,000 4 100,000 You are required to compute the PBP Illustration 2 Two projects A and B with the following relevant information Project A Project B Year ₦ ₦ 0 200,000 200,000 1 60,000 80,000 2 80,000 80,000 3 80,000 40,000 4 100,000 60,000 5 60,000 Required: Compute the payback period.

Initial Outlay = ₦200,000

The cumulative cash flow becomes positive in Year 3. This means the payback period is between Year 2 and Year 3.

The amount remaining to be recovered at the end of Year 2 is ₦120,000.
The cash inflow in Year 3 is ₦180,000.

Fractional part = (Amount to be recovered) / (Cash flow in the next year)
Fractional part = ₦120,000 / ₦180,000
Fractional part = 0.6667 years (approximately)

Payback Period = 2 years + 0.6667 years
Payback Period = 2.67 years

Illustration 2: Projects A and B

Project A

Initial Outlay = ₦200,000

The cumulative cash flow becomes positive in Year 3. This means the payback period is between Year 2 and Year 3.

The amount remaining to be recovered at the end of Year 2 is ₦60,000.
The cash inflow in Year 3 is ₦80,000.

Fractional part = (Amount to be recovered) / (Cash flow in the next year)
Fractional part = ₦60,000 / ₦80,000
Fractional part = 0.75 years

Payback Period = 2 years + 0.75 years
Payback Period for Project A = 2.75 years

Project B

Initial Outlay = ₦200,000

The cumulative cash flow becomes exactly zero at the end of Year 3.

Payback Period for Project B = 3 years