Question

An electronics company estimated the investment cost for equipment for producing replacement CCTV will be $800,000. The operating and maintenance cost is expected to be $500,000 per year with an annual revenues estimated at $650,000. Considering MARR of 15% per year, find: The simple payback period=??years The discounted payback period=.??years

Answer 1

Simple Payback = Investment cost / (Revenues – maintenance cost)

                           = 800,000 / (650,000 – 500,000)

                           = 800,000 / 150,000

                           = 5.33 years

Discounted payback:

NCF = Revenues – Maintenance cost = 650,000 – 500,000 = 150,000

Present value (PV) of future cash flows should be calculated first.

Year	NCF	15% factor (F) = 1/1.15^year	PV = NCF × F	NPV
0	-800,000	1/1.15^0 = 1	-800,000	-800,000
1	150,000	1/1.15^1 = 0.8696	130,440	-800000 + 130440 = -669560
2	150,000	0.7561	113,415	-669560 + 113415 = -556145
3	150,000	0.6575	98,625	-556145 + 98625 = -457520
4	150,000	0.5718	85,770	-457520 + 85770 = -371750
5	150,000	0.4972	74,580	-371750 + 74580 = -297170
6	150,000	0.4323	64,845	-297170 + 64845 = -232325
7	150,000	0.3759	56,385	-232325 + 56385 = -175940
8	150,000	0.3269	49,035	-175940 + 49035 = -126905
9	150,000	0.2843	42,645	-126905 + 42645 = -84260
10	150,000	0.2472	37,080	-84260 + 37080 = -47180
11	150,000	0.2149	32,235	-47180 + 32235 = -14,945
12	150,000	0.1869	28,035	-14945 + 28,035 = 13090

Discounted payback period is the year in which the net present value (NPV) changes from negative to positive. It happens between 11^th and 12^th year.

Discounted payback period = 11^th year + [NPV of 11^th year / PV of 12^th year]   

                                             = 11 + (14,945 / 28,035)

                                             = 11 + 0.53

                                             = 11.53 years