Question

ABC company is evaluating an engineering project which will last for 5 years. For an initial investment of $95 million, annual net revenues are estimated to be $20 million in Year 1 to 3 and $39 million in Year 4 and 5. Assume the MARR is 6% per year and a salvage value of 1 million at the end of this project.

What is the simple payback period for this project? Show the cumulative Present Worth for each year.

Answer 1

Payback period is 3.90 years

Year	Investment	Net annual cash flow	Cumulative net cash flow	Balance to be recovered
0	(95,000,000)		-	95,000,000.00
1		20,000,000	20,000,000	75,000,000.00
2		20,000,000	40,000,000	55,000,000.00
3		20,000,000	60,000,000	35,000,000.00
4		39,000,000	99,000,000	-
5		39,000,000	138,000,000	-
Capital is recovered fully in year 4
Pay back period is		3 + 35000000/39000000	3.90

Year	Cash flow	× discount rate	Discounted cash flow	Cumulative present worth
0	$(95,000,000)	1.00000	$ (95,000,000.00)	$                         -
1	$ 20,000,000	0.90909	$ 18,181,818.18	$   18,181,818.18
2	$ 20,000,000	0.82645	$ 16,528,925.62	$   34,710,743.80
3	$ 20,000,000	0.75131	$ 15,026,296.02	$   49,737,039.82
4	$ 39,000,000	0.68301	$ 26,637,524.76	$   76,374,564.58
5	$ 39,000,000	0.62092	$ 24,215,931.60	$ 100,590,496.18