Question

A project is projected to cost $2,000,000 to undertake.  It will generate positive cash inflows as follows:  Year 1 - $400,000; Year 2 – 500,000; Year 3 - $650,000; Year 4 – 750,000; Year 5 – 800,000.  What is the project’s discounted payback, given a 10% required rate of return?

Select one:

a. 4.45 years

b. 4.82 years

c. 4.92 years

d. 5.0 years

e. Discounted payback does not occur

Answer 1

Solution:
	CALCULATION OF DISCONTED CASH INFLOW PER YEAR
	Years	Particulars	Annual Cash Inlows	PVF of $ 1 @ 10%	Discounted Value
	1	Inflow	$       400,000	0.90909	$           363,636.36
	2	Inflow	$       500,000	0.82645	$           413,223.14
	3	Inflow	$       650,000	0.75131	$           488,354.62
	4	Inflow	$       750,000	0.68301	$           512,260.09
	5	Inflow	$       800,000	0.62092	$           496,737.06
	CACULATION OF DISCOUNTED PAYBACK PERIOD
	Years	Particulars	Annual Cash Flows	Cumulative Value
	0	Outflow	$ -2,000,000	$             -2,000,000
	1	Inflow	$       363,636	$             -1,636,364
	2	Inflow	$       413,223	$             -1,223,140
	3	Inflow	$       488,355	$                 -734,786
	4	Inflow	$       512,260	$                 -222,526
	5	Inflow	$       496,737	$                  274,211
		Total
	All the investment is recovered in the year 5 but not all the whole year is required for this
	So the we have to calculate the fraction as below,
	Payback Period =	4 Years +	222,526	"/" By	$          496,737
	Payback Period =	4 Years +	0.45
	Payback Period =	4.45 Years
	Answer = Option A = 4.45 Years