Calculate payback with uneven cash flows
Accumulate unequal annual net cash flows and find the recovery year and any partial year.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. This topic covers future net cash flows, payback, ARR, NPV, IRR and supported investment decisions. Discounted payback and questions involving a residual value at the end of a project are excluded by Cambridge. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topics 1.5–1.6 for profit, depreciation and financial analysis, and Topic 2.1 for contribution. Keep accounting profit, project cash flow and the time value of money distinct.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Initial investment is $70,000; inflows are $30,000 and $25,000. How much remains after year 2?
What you will learn
- Prepare cumulative cash flows
- Identify the recovery year
- Calculate a partial-year payback using a stated assumption
Track the unrecovered balance
For unequal flows, add each period's net cash inflow to the cumulative total. Payback occurs when cumulative inflows first equal or exceed the initial investment.
If the amount remaining at the start of the recovery year is divided by that year's inflow, the fraction assumes cash is received evenly through the year. Add it to the completed years.
Make timing assumptions visible
If cash arrives only at year end, recovery occurs at that year end. Use a fractional-year answer only where the question's convention supports it.
Payback ignores later cash flows and does not discount for the time value of money. It measures recovery time, not total project value.
Pause and explain
An unrecovered $18,000 is covered by a $36,000 inflow, assumed even through the year. What fraction is needed?
Worked example
Investment is $100,000. Net inflows are $40,000, $35,000 and $45,000 in years 1–3. Assuming year-3 cash arrives evenly, find payback.
Show the worked solution
- Cumulative inflows after years 1 and 2 are $40,000 and $75,000.
- Unrecovered at the start of year 3 = 100,000 − 75,000 = $25,000.
- Year-3 fraction = 25,000 ÷ 45,000 = 0.556.
Answer Payback is approximately 2.56 years under the even-receipt assumption.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Investment is $90,000; inflows are $50,000, $25,000 and $30,000. Assuming even receipts in year 3, find payback.
Give me a hint
Accumulate years 1 and 2, then divide the balance by year 3's inflow.
Compare my reasoning
- After year 1: $50,000.
- After year 2: $75,000; $15,000 remains.
- Year-3 fraction = 15,000 ÷ 30,000 = 0.5.
Payback is 2.5 years under the even-receipt assumption.
Look for these in your work
- Cumulative amount correct
- Balance correct
- Partial year correct
A project costs $120,000. Inflows are $30,000, $45,000, $50,000 and $35,000 at each year end. Assuming even cash during the recovery year, find payback.
Give me a hint
Find the cumulative total before recovery.
Compare my reasoning
- After years 1 and 2, cumulative inflows are $75,000.
- After year 3, cumulative inflows are $125,000, so $45,000 remains at the start of year 3.
- 45,000 ÷ 50,000 = 0.90; payback = 2.90 years.
Payback is 2.90 years under the even-receipt assumption.
Look for these in your work
- Recovery year identified
- Balance calculated
- Partial period stated
A project pays back halfway through year 3 under an even-flow assumption, but cash actually arrives at year end. What is the strict year-end answer?
Give me a hint
Do not split a year-end payment into a fraction.
Compare my reasoning
- At the start of year 3, some investment remains unrecovered.
- The inflow arrives at the end of year 3.
- Recovery is therefore reported at the end of year 3.
With year-end receipts only, payback is 3 years; 2.5 years needs an even-flow assumption.
Look for these in your work
- Timing distinguished
- Recovery date correct
- Assumption explained
Common mistakes
- Dividing the full investment by the last year's inflow
- Using the wrong cumulative balance
- Giving a fractional year without its timing assumption
What can you explain now?
How do you locate the recovery year with unequal inflows?
Compare with the explanation
Find when cumulative net inflows first recover the initial investment
Cumulative totals show how much of the initial outflow remains unrecovered.
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Make it stick
When is a fractional-year payback appropriate?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.