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A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year...

A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 7 years, and a cost of capital of 12%. What is the project's discounted payback period? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

Present value of year 1 cash flow = 12000 / (1 + 0.12) = 10,714.28571

Present value of year 2 cash flow = 12000 / (1 + 0.12)² = 9,566.32653

Present value of year 3 cash flow = 12000 / (1 + 0.12)³ = 8,541.36297

Present value of year 4 cash flow = 12000 / (1 + 0.12)⁴ = 7,626.21694

Present value of year 5 cash flow = 12000 / (1 + 0.12)⁵ = 6,809.12227

Present value of year 6 cash flow = 12000 / (1 + 0.12)⁶ = 6,079.57345

Present value of year 7 cash flow = 12000 / (1 + 0.12)⁷ = 5,428.19058

Cumulative cash flow for year 0 = -52,125

Cumulative cash flow for year 1 = -52,125 + 10,714.28571 = -41,410.71429

Cumulative cash flow for year 2 = -41,410.71429 + 9,566.32653 = -31,844.38776

Cumulative cash flow for year 3 = -31,844.38776 + 8,541.36297 = -23,303.02479

Cumulative cash flow for year 4 = -23,303.02479 + 7,626.21694 = -15,676.80785

Cumulative cash flow for year 5 = -15,676.80785 + 6,809.12227 = -8,867.68558

Cumulative cash flow for year 6 = -8,867.68558 + 6,079.57345 = -2,788.11213

Cumulative cash flow for year 7 = -2,788.11213 + 5,428.19058 = 2,640

2,788.11213 / 5,428.19058 = 0.51

Discounted payback period = 6 + 0.51 = 6.51 years

jeff jeffy answered 4 months ago

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