Question

A Company is planning to undertake a project requiring initial investment of $50 million and is expected to generate $10 million in Year 1, $13 million in Year 2, $16 million in year 3, $19 million in Year 4 and $22 million in Year 5.

1. Calculate the payback value of the project.
2. Calculate the discount payback value of the project (i=12%).

Answer 1

a)

EOY	Net Cash Flow(million $)	Cumulative cash flow(million $)
0	-50	-50
1	10	-40
2	13	-27
3	16	-11
4	19	8
5	22	30

Payback period = 3 + |-11| / 19

                          = 3 + (11 / 19)

                          = 3.59 years

b)

Col 1	Col 2	Col 3	Col 4	Col 5
Year	Cash flows ( million $)	Present Value Factor (P/F, 12%, n)	Discounted Cash Flow ( million $) Col 2 * Col 3	Cumulative Discounted cash flows( million$)
0	-50	1.0000	-50.00	-50.00
1	10	0.8929	8.93	-41.07
2	13	0.7972	10.36	-30.71
3	16	0.7118	11.39	-19.32
4	19	0.6355	12.07	-7.24
5	22	0.5674	12.48	5.24

Discounted Payback period = 4 + |-7.24| / 12.48

                            = 4 + (7.24 / 12.48)

                        = 4.58 years