Question

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.

Answer 1

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