An investment project costs $13,900 and has annual cash flows of $3,400 for six years. ...

An investment project costs $13,900 and has annual cash flows of $3,400 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?

Expert Solution

a.	Discounted payback period		4.09 Years

Working:

	Payback period is the time within which investment will be recovered back.
	Discounted payback period considers time value of money.

	Year	Cash flow	Discount factor	Present value	Cumulative present value
	a	b	c=1.00^-a	d=b*c	e
	1	3400	1.000	3400	3400
	2	3400	1.000	3400	6800
	3	3400	1.000	3400	10200
	4	3400	1.000	3400	13600
	5	3400	1.000	3400	17000
	6	3400	1.000	3400	20400

	Discounted payback	=	4+((13900-13600)/3400)
		=	4.09

b.	Discounted payback period		4.69 Years

Working:

	Payback period is the time within which investment will be recovered back.
	Discounted payback period considers time value of money.

	Year	Cash flow	Discount factor	Present value	Cumulative present value
	a	b	c=1.05^-a	d=b*c	e
	1	3400	0.952	3,238.10	3,238.10
	2	3400	0.907	3,083.90	6,322.00
	3	3400	0.864	2,937.05	9,259.04
	4	3400	0.823	2,797.19	12,056.23
	5	3400	0.784	2,663.99	14,720.22
	6	3400	0.746	2,537.13	17,257.35

	Discounted payback	=	4+((13900-12056.23)/2663.99)
		=	4.69

jeff jeffy answered 6 months ago

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