Question

A project has the following total (or net) cash flows.

               ________________________________________

                Year         Total (or net) cash flow

               ________________________________________

1 $50,000
2 70,000
3 80,000
4 100,000
_______________________________________   

The required rate of return on the project is 13 percent. The initial investment (or initial cost or initial outlay) of the project is $100,000.
a) Find the (regular) payback period of the project.
b) Compute the discounted payback period of the project.

6. A project has the following total (or net) cash flows.

Answer 1

a). Calculating the (regular) payback period of the project:-

Year	Cash Flows of Project ($)	Cummulative Cash Flows of Project ($)
0	(100,000.00)	(100,000.00)
1	50,000.00	(50,000.00)
2	70,000.00	20,000.00
3	80,000.00	100,000.00
4	100,000.00	200,000.00
	200,000.00

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

= 1 years + (50,000/70,000)

= 1.7143 years

b). Calculating the discounted payback period of the project:-

Year	Cash Flows of Project ($)	PV Factor @13%	Present Value of Cash Flow of Project ($)	Cummulative Present Value of Cash Flows of Project ($)
0	(100,000.00)	1.0000	(100,000.00)	(100,000.00)
1	50,000.00	0.8850	44,247.79	(55,752.21)
2	70,000.00	0.7831	54,820.27	(931.94)
3	80,000.00	0.6931	55,444.01	54,512.07
4	100,000.00	0.6133	61,331.87	115,843.94
			115,843.94

Discounted Payback Period = Years before the Discounted Payback period occurs + (Cummulative cash flow in the year before recovery/Discounted Cash flow in the year before recovery)

= 2 years + (931.94/55,444.01)

= 2.0168 years

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