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(Discounted payback period) The Callaway Cattle Company is considering the construction of a new feed handling...
(Discounted payback period) The Callaway Cattle Company is considering the construction of a new feed handling system for its feed lot in Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling $190,000 while the initial investment is only $510,000. Callaway's management has used a simple payback method for evaluating new investments in the past but plans to calculate the discounted payback to analyze the investment. Where the appropriate discount rate for this type of project is 12 percent, what is the project's discounted payback period?
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Expert Solution
| Year | Cash flows | Present value@12% | Cumulative Cash flows |
| 0 | (510,000) | (510,000) | (510,000) |
| 1 | 190,000 | 169642.86 | (340357.14) |
| 2 | 190,000 | 151466.84 | (188890.3) |
| 3 | 190,000 | 135238.25 | (53652.05) |
| 4 | 190,000 | 120748.44 | 67096.39(Approx) |
Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=3+(53652.05/120748.44)
=3.44 years(Approx)
jeff jeffy answered 2 years agoRelated Solutions
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