1. Payback
   The cumulative cash flows are detailed below:

   Year	0	1	2	3	4	5	6	7
   Inflows	(900)	(700)	(450)	(150)	300	700	900	1050

   Payback occurs during Year 4. £450 000 revenues are generated in Year 4. Because £150 000 remained to be paid off at the start of Year 4, the payback period is 3 Years + 150/450 = 1/3 rd of a year.
   
   Payback = 3 1/3rd years = 3 years and 4 months
   
2. Average Rate of Return
   
   ARR = (Average annual profits / Initial capital costs) * 100
   ARR = (£278 571 / £900 000) * 100
   = 0.310 * 100
   = 30.95 %
   

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