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In: Finance

Project L costs $40,000, its expected cash inflows are $10,000 per year for 10 years, and...

Project L costs $40,000, its expected cash inflows are $10,000 per year for 10 years, and its WACC is 10%. What is the project's payback? Round your answer to two decimal places.

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Expert Solution

Note: As it is not mentioned which Payback is to be calculated, Both, Simple and Discounted Payback are calculated.

Simple Payback Period(when Cash Flow is SAME each year) = Initial Cost/Annual Cash Flow = 40000/10000 = 4 years

Year Cash Flow Discounted Cash Flow
[Cash Flow/(1.1^year)]		 Cumulative Cashflow
[current cash flow + all previous cashflows]
1 10000 9090.909091 9090.909091
2 10000 8264.46281 17355.3719
3 10000 7513.148009 24868.51991
4 10000 6830.134554 31698.65446
5 10000 6209.213231 37907.86769
6 10000 5644.739301 43552.60699
As Initial Outlay is 40000, it will be recoverd
in between year 5 & 6. Therefore, Payback
Period will be between 5th and 6th year.
Payback Period will be 5 years + proportionate of 6th year
Payback Period = 5+[(40000-37907.86769)/(43552.60699-37907.86769)]
Discounted Payback Period
= 5.37 years

jeff jeffy answered 1 year ago
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