Erica is considering a project that will produce cash inflows of $2,999 a year for 3...

Erica is considering a project that will produce cash inflows of $2,999 a year for 3 years. The required rate of return is 15 percent and the initial cost is $6,800. What is the discounted payback period?

Expert Solution

Answer is Payback period = 2.98 years

Year	Cashflow A	PVF@15%	Present value of cash flow	Incremental Cashflow*PVF
0	(6,800)	1	(6,800.00)	-6800.00
1	2,999	0.8696	2,607.83	-4192.17
2	2,999	0.7561	2,267.67	-1924.50
3	2,999	0.6575	1,971.89	47.39

Payback period = Year before full recovery+[Unrecovered cost at start of year/cash flow during the year]
Year before full recovery = 2
Unrecovered cost at start of year = 1924.50
cash flow during the year = 1971.89

Payback period = 2 + [1924.50/1971.89]
Payback period = 2.975 years or 2.98 years

jeff jeffy answered 2 years ago

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