Question

A college friend of mine just filed for a patent for a new product – the “bowling buddy” bowlers’ training aid (Google it after the exam). The bowling buddy sells for $55 and the variable cost per unit is $26. They rent production space for $25,000 annually. The initial investment is $250,000 and the project life is 5 years. Assume appropriate discount rate is 10% and ignore taxes. Assuming my friend can sell 3,000 bowling buddies per year, what is the discounted payback period of the project?

Answer 1

cash outflow in year 0 = initial investment

cash inflow in years 1 to 5 = net income each year = revenues - variable costs - rent

Discounted cash flow of each year = cash flow / (1 + discount rate)ⁿ

where n = number of years after which the cash flow occurs

Discounted payback period is the time taken for the cumulative discounted cash flows to equal zero.

From the below calculation, it can be seen that the cumulative discounted cash flows never equal zero, i.e. they are negative until the end of the project's life.

As the project ends in 5 years, the discounted payback period cannot be determined