FMBpp mcq practise kit 34.2 page 26

The payback period is the number of years it takes to get back the original investment of (in this case) 46,000 in cash terms. The depreciation each year is (46,000 - 7,000) / 4 = 9,750. Therefore the cash inflow flow in the first year is the profit before depreciation, which is 26,250. This means that after the first year they still need another 46,000 - 26,250 = 19,750. The cash inflow in the second year = 23500 + 9750 = 33,250. They only need another 19750 to get back the original investment and therefore since the cash flows arise evenly, it will take 19750/33250 x 12 = 7.12 months of the second year. So the total payback period is 1 year 7 months (to the nearest month). Annuities are when there are equal cash flows each year (which there are not here) and are only relevant in discounted cash flow exercises (and payback period is not discounted cash flow). I suggest that you watch our Paper F2 lectures on investment appraisal, because payback period is revision from Paper F2.