Question

The Callaway Cattle Company is considering the construction of a new feed handling system for its feed lot in​ Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling 195000 while the initial investment is only 510000 Callaway's management has used a simple payback method for evaluating new investments in the past but plans to calculate the discounted payback to analyze the investment. Where the appropriate discount rate for this type of project is 8 percent. what is the​ project's discounted payback​ period?

Answer 1

Project’s Discounted Payback Period

Year	Cash Flows	Present Value Factor at 8%	Discounted Cash Flow	Cumulative net discounted Cash flow
0	-5,10,000	1.00000	-5,10,000.00	-5,10,000.00
1	1,95,000	0.92593	1,80,555.56	-3,29,444.44
2	1,95,000	0.85734	1,67,181.07	-1,62,263.37
3	1,95,000	0.79383	1,54,797.29	-7,466.09
4	1,95,000	0.73503	1,43,330.82	1,35,864.73
5	1,95,000	0.68058	1,32,713.72	2,68,578.46

Project’s Discounted Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 3 Year + ($7,466.09 / $1,43,330.82)

= 3 Year + 0.05 Years

= 3.05 Years

“The Project’s Discounted Payback Period = 3.05 Years”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.