Question

Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.
WACC:		8%
Year:		0			1	2		3
Cash flows:		-$1,100			$550	$550		$550

Answer 1

Answer:
Calculation of discounted payback period
Formula
Payback period = Year before full recovery of cost + Balance cost to be recovered/cash inflow during the year
Calculation of cummulative cash inflow
Year	Cash inflows	PVF @ 8%	Present Value	Cummulative inflows
1	550.00	0.9259	509.26	509.26
2	550.00	0.8573	471.54	980.80
3	550.00	0.7938	436.61	1,417.40
Initial cost =	$1,100
Payback period = 2 years + ($1100 - $980.80)/436.61
	= 2 years + 119.20/436.61
	= 2 years + .27 year
	= 2.27 years
So, Discount payback period is 2.27 years