Question

In: Finance

An investment project costs $16,400 and has annual cash flows of $3,500 for six years. a....

An investment project costs $16,400 and has annual cash flows of $3,500 for six years.

a. What is the discounted payback period if the discount rate is zero percent?

b. What is the discounted payback period if the discount rate is 5 percent?

c. What is the discounted payback period if the discount rate is 20 percent?

Solutions

Expert Solution

If dicount rate = 5%
Year Cash flows Discount rate Discounted cash flow Cumulative Discounted cash flows
0        (16,400) 1                    (16,400.00)                                            (16,400.00)
1            3,500 0.952                        3,332.00                                            (13,068.00)
2            3,500 0.907                        3,174.50                                              (9,893.50)
3            3,500 0.864                        3,024.00                                              (6,869.50)
4            3,500 0.823                        2,880.50                                              (3,989.00)
5            3,500 0.784                        2,744.00                                              (1,245.00)
6            3,500 0.746                        2,611.00                                                1,366.00
Discounted payback period = 5 years + 1245/2611
=5.48 years
If discount rate = 20%
Year Cash flows Discount rate Discounted cash flow Cumulative Discounted cash flows
0        (16,400) 1                    (16,400.00)                                            (16,400.00)
1            3,500 0.833                        2,915.50                                            (13,484.50)
2            3,500 0.694                        2,429.00                                            (11,055.50)
3            3,500 0.579                        2,026.50                                              (9,029.00)
4            3,500 0.482                        1,687.00                                              (7,342.00)
5            3,500 0.402                        1,407.00                                              (5,935.00)
6            3,500 0.335                        1,172.50                                              (4,762.50)

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