Question

In: Finance

Nugent Communication Corp. is investing $7,575,349 in new technologies. The company expects significant benefits in the...

Nugent Communication Corp. is investing $7,575,349 in new technologies. The company expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years.

Cash Flows:  Year 1: $2,096,205 Year 2: $4,958,521 Year 3: $3,364,720 Year 4-7: $1,356,625

What is the discounted payback period for the project assuming a discount rate of 10 percent?

Solutions

Expert Solution

Payback period calculation is the simple calcualtion for checking the
return of our Basis investment in year
CACULATION OF PAYBACK PERIOD
Time Particulars Inflow (Outflow) PVF of $ 1 @ 10% Present Value Cumulative Present Value
0 Outflow $             -75,75,349                    1.000000 $        -75,75,349.00 $        -75,75,349.00
1 Inflow $               20,96,205                    0.909091 $         19,05,640.91 $        -56,69,708.09
2 Inflow $               49,58,521                    0.826446 $         40,97,951.24 $        -15,71,756.85
3 Inflow $               33,64,720                    0.751315 $         25,27,963.94 $            9,56,207.09
4 Inflow $               13,56,625                    0.683013 $            9,26,593.13 $          18,82,800.21
5 Inflow $               13,56,625                    0.620921 $            8,42,357.39 $          27,25,157.60
6 Inflow $               13,56,625                    0.564474 $            7,65,779.45 $          34,90,937.05
7 Inflow $               13,56,625                    0.513158 $            6,96,163.13 $          41,87,100.18
All the investment is recovered in the year 3 but not all the whole year is required for this
So the we have to calculate the fraction as below,
Payback Period = 2 Years +               15,71,756.9 "/" By $          25,27,963.94
Payback Period = 2 Years + 0.62
Payback Period = 2.62 Years
Answer = Payback Period = 2.62 Years

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