Your company is considering investing in a new project and wants to know the discounted payback...

Your company is considering investing in a new project and wants to know the discounted payback period. The initial investment in the project is $12,000 and the expected annual profit is $2,800 per year. You also expect to have to have to overhaul the equipment every 4 years, which will cost $600 (that is, in years 4, 8, 12, etc. The project will also make the $2,800 profit in those years). Given an interest rate of 8%, what is the discounted payback period?

Expert Solution

Calculation of discounted payback period
Year	Cash flow	PVF	PV	Cumulative Present value
0	-12000	1	-12000	-12000
1	2800	0.925925926	2592.592593	-9407.407407
2	2800	0.85733882	2400.548697	-7006.858711
3	2800	0.793832241	2222.730275	-4784.128436
4	2200	0.735029853	1617.065676	-3167.06276
5	2800	0.680583197	1905.632952	-1261.429808
6	2800	0.630169627	1764.474955	503.0451474
7	2800	0.583490395	1633.773107	2136.818254
8	2200	0.540268885	1188.591546	3325.4098

Hence, discounted payback period = 5 + 1261.43/1764.475 = 5.7149 years

jeff jeffy answered 2 months ago

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Your company is considering investing in a new project and wants to know the discounted payback...

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