Question

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?

Answer 1

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)