Question

Hendrix Guitar is considering the following Project. The Projected cash flows are below: Initial Cost is $ 2.1 million; annual net cash flows are $750, 000 per year for 5 years. what is the discounted Payback Period if the appropriate discount rate is 7.5%?

Answer 1

Given about Hendrix Guitar's project,

Initial cost C0 = $2100000

annual net cash flows CF = $750000

discount rate r = 7.5%

discounted payback period is time period in which PV of the cash flows equal C0 at discount rate d

Cumulative cash flows are calculated in table below:

discounted cash flow = Cash flow/(1.075)^year

cumulative discounted cash flow = cumulative discounted cash flow of last year + current years

year	Cash flow	discounted cash flow	cumulative discounted cash flow
0	$ -21,00,000.00	$             -21,00,000.00	$ -21,00,000.00
1	$     7,50,000.00	$                 6,97,674.42	$ -14,02,325.58
2	$     7,50,000.00	$                 6,48,999.46	$    -7,53,326.12
3	$     7,50,000.00	$                 6,03,720.43	$    -1,49,605.70
4	$     7,50,000.00	$                 5,61,600.40	$     4,11,994.70
5	$     7,50,000.00	$                 5,22,418.97	$     9,34,413.68

discounted payback period = years of cash flow before cumulative cash flow is negative - (cumulative discounted cash flow of year before turning positive/discounted cash flow of positive cumulative discounted cash flow)

= 3 - (-149605.70/561600.40) = 3.27 years

So, discounted payback period of the project = 3.27 years