Question
In: Finance
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?
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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 agoRelated Solutions
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0
1
2
3
4
5
Cash flow:
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$1,880
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