Question

Project L costs $55,000, its expected cash inflows are $13,000 per year for 8 years, and its WACC is 7%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Present value of year 1 cash flow = 13,000 / (1 + 0.07) = 12,149.5327

Present value of year 2 cash flow = 13,000 / (1 + 0.07)² = 11,354.7035

Present value of year 3 cash flow = 13,000 / (1 + 0.07)³ = 10,611.8724

Present value of year 4 cash flow = 13,000 / (1 + 0.07)⁴ = 9,917.63776

Present value of year 5 cash flow = 13,000 / (1 + 0.07)⁵ = 9,268.82033

Present value of year 6 cash flow = 13,000 / (1 + 0.07)⁶ = 8,662.44891

Present value of year 7 cash flow = 13,000 / (1 + 0.07)⁷ = 8,095.74664

Cumulative cash flow for year 0 = -55,000

Cumulative cash flow for year 1 = -55,000 + 12,149.5327 = -42,850.4673

Cumulative cash flow for year 2 = -42,850.4673 + 11,354.7035 = -31,495.7638

Cumulative cash flow for year 3 = -31,495.7638 + 10,611.8724 = -20,883.8914

Cumulative cash flow for year 4 = -20,883.8914 + 9,917.63776 = -10,966.25364

Cumulative cash flow for year 5 = -10,966.25364 + 9,268.82033 = -1,697.43331

Cumulative cash flow for year 6 = -1,697.43331 + 8,662.44891 = 6,965.0156

1,697.43331 / 8,662.44891 = 0.20

Discounted payback period = 5 + 0.20 = 5.20 years