Question

the cost for a four year project is 1,400,000. The respective cash inflows for years 1,2,3,and 4 are 600,000 , 700,000 , 500,000 , and 200,000. What is the discounted payback period if the discount rate is 6%.

No financial calculator work by hand step by step.   

Answer 1

Payback period

= A + B / C

Where,

A = Year corresponding to the last cumulative cash flow period

B = Positive value of the last negative cumulative cash flow

C = Cash flow for the year following the last negative cumulative cash flow

The discounted payback period is calculated as follows

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 6% or 0.06

n = Years = 0 to 4

So, PV Factor for year 2 will be

= 1 / (1.06^2)

= 1 / 1.1236

= 0.889996

Calculations	A	B	C = A x B	D = Sum C
Year	Cash Flows	PV Factor	Present Value	Cumulative C
0	(1,400,000)	1.000000	(1,400,000)	(1,400,000)
1	600,000	0.943396	566,038	(833,962)
2	700,000	0.889996	622,998	(210,965)
3	500,000	0.839619	419,810	208,845
4	200,000	0.792094	158,419	367,264

So, payback period

= 2 + | -210,965| / 419,810

= 2 + 0.50

= 2.50 years