Question

Project L costs $30,000, its expected cash inflows are $8,000 per year for 8 years, and its WACC is 10%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Present value of year 1 cash flow = 8000 / (1 + 0.1) = 7,272.7272

Present value of year 2 cash flow = 8000 / (1 + 0.1)² = 6,611.570248

Present value of year 3 cash flow = 8000 / (1 + 0.1)³ = 6,010.518407

Present value of year 4 cash flow = 8000 / (1 + 0.1)⁴ = 5,464.107643

Present value of year 5 cash flow = 8000 / (1 + 0.1)⁵ = 4,967.370584

Present value of year 6 cash flow = 8000 / (1 + 0.1)⁶ = 4,515.79144

Present value of year 7 cash flow = 8000 / (1 + 0.1)⁷ = 4,105.264946

Present value of year 8 cash flow = 8000 / (1 + 0.1)⁸ = 3,732.059042

Cumulative cash flow for year 0 = -30,000

Cumulative cash flow for year 1 = -30,000 + 7,272.7272 = -22,727.2728

Cumulative cash flow for year 2 = -22,727.2728 + 6,611.570248 = -16,115.70255

Cumulative cash flow for year 3 = -16,115.70255 + 6,010.518407 = -10,105.18415

Cumulative cash flow for year 4 = -10,105.18415 + 5,464.107643 = -4,641.076502

Cumulative cash flow for year 5 = -4,641.076502 + 4,967.370584 = 326

4,641.076502 / 4,967.370584 = 0.93

Discounted payback = 4 + 0.93 = 4.93 years