Question

Problem 13-8 Discounted Payback (LG13-2)

Compute the discounted payback statistic for Project D if the appropriate cost of capital is 11 percent and the maximum allowable discounted payback is four years. (Do not round intermediate calculations and round your final answer to 2 decimal places. If the project does not pay back, then enter a "0" (zero).)

Project D
Time:	0	1	2	3	4	5
Cash flow:	–$12,800	$3,530	$4,540	$1,880	$0	$1,360

Problem 13-8 Discounted Payback (LG13-2)

Compute the discounted payback statistic for Project D if the appropriate cost of capital is 11 percent and the maximum allowable discounted payback is four years. (Do not round intermediate calculations and round your final answer to 2 decimal places. If the project does not pay back, then enter a "0" (zero).)

Project D
Time:	0	1	2	3	4	5
Cash flow:	–$12,800	$3,530	$4,540	$1,880	$0	$1,360

discounted payback period

years

Should the project be accepted or rejected?

• accepted

• rejected

Answer 1

Discounted Payback Period

Year	Cash Flows ($)	Present Value Factor at 11%	Discounted Cash Flow ($)	Cumulative net discounted Cash flow ($)
0	-12,800	1.00000	-12,800.00	-12,800.00
1	3,530	0.90090	3,180.18	-9,619.82
2	4,540	0.81162	3,684.77	-5,935.05
3	1,880	0.73119	1,374.64	-4,560.41
4	0	0.65873	0	-4,560.41
5	1,360	0.59345	807.09	-3,753.32
	TOTAL		9,046.68

With the discount rate of 11%, The Project will not payback within 5 years. Therefore, The Discounted payback period is calculated as follows

= Initial Investment / Average Discounted cash flow

= $12,800 / [$9,046.68 / 5 Years]

= $12,800 / $1,809.34

= 7.07 Years

“The Discounted Payback for Project D would be 7.07 Years”

Decision

The Project should be “REJECTED”, Since the Payback Period for the Project (7.07 Years) is greater than the maximum allowable discounted payback period (4 Years)

NOTE

The Formula for calculating the Present Value Factor is is [1/(1 + r)ⁿ], Where “r” is the Discount Rate and “n” is the number of years.