In: Finance
Assume you have the following information on Project X: Initial Investment -$1,000 Required rate of return = 10%
Year |
Cash Flow |
Present Value of CF |
Accum. Discount CF |
0 |
-1000 |
-1000 |
-1000 |
1 |
200 |
182 |
182 |
2 |
400 |
331 |
513 |
3 |
700 |
526 |
1039 |
4 |
300 |
205 |
1244 |
What is the discount payback period?
Solution: | ||||
Discount payback period | 2.93 | Years | ||
Working Notes: | ||||
Notes: | In the given information accumulated discount cash flow is given which does not considered the initial investment which is required for calculation of discount payback period, hence we have to do again that portion. | |||
Given | ||||
a | b | c= a x b | ||
Year | Cash flows | PVF @ 10% | Present Value of CF | Accum. Discount CF |
0 | ($1,000) | 1 | -1000 | -1000 |
1 | $200 | 0.909090909 | 182 | 182 |
2 | $400 | 0.826446281 | 331 | 513 |
3 | $700 | 0.751314801 | 526 | 1039 |
4 | $300 | 0.683013455 | 205 | 1244 |
We rework for computation of Discount payback period | ||||
a | ||||
Year | Cash flows | Present Value of CF | Accumulated cash flow | |
0 | ($1,000) | -1000 | -1000 | |
1 | $200 | 182 | -818 | [-1000+182] |
2 | $400 | 331 | -487 | [-818+331] |
3 | $700 | 526 | 39 | [-487+526] |
4 | $300 | 205 | 244 | [39+244] |
Notes: | Since cumulative discounted cash flow becomes positive at 3rd years means discounted payback period is between 2nd & 3rd year | |||
Discounted Payback period = 2 year + Acc. balance of 2nd year /discounted cash flow of 3rd year | ||||
Discounted Payback period = 2 year + 487 /526 | ||||
Discounted Payback period = 2 years + 0.9258555 | ||||
Discounted Payback period = 2.9258555 | ||||
Discounted Payback period = 2.93 years | ||||
Notes: PVF is calculated @ 10% = 1/(1+0.10)^n where n is the period for which PVF is calculated. | ||||
Please feel free to ask if anything about above solution in comment section of the question. |