Question

Project L requires an initial outlay at t = 0 of $25,000, its expected cash inflows are $5,000 per year for 9 years, and its WACC is 11%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places.

  years

Answer 1

Present value of year 1 cash flow = 5000 /(1+ 0.11)¹ = 4,504.5045

Present value of year 2 cash flow = 5000 /(1+ 0.11)² = 4,058.1122

Present value of year 3 cash flow = 5000 /(1+ 0.11)³ = 3,655.9569

Present value of year 4 cash flow = 5000 /(1+ 0.11)⁴ = 3,293.6549

Present value of year 5 cash flow = 5000 /(1+ 0.11)⁵ = 2,967.2566

Present value of year 6 cash flow = 5000 /(1+ 0.11)⁶ = 2,673.2042

Present value of year 7 cash flow = 5000 /(1+ 0.11)⁷ = 2,408.29205

Present value of year 8 cash flow = 5000 /(1+ 0.11)⁸ = 2,169.6325

Present value of year 9 cash flow = 5000 /(1+ 0.11)⁹ = 1,954.62386

Cumulative cash flow for year 0 = -25000

Cumulative cash flow for year 1 = -25000 + 4,504.5045 = -20,495.4955

Cumulative cash flow for year 2 = -20,495.4955 + 4,058.1122 = -16,437.3833

Cumulative cash flow for year 3 = -16,437.3833 + 3,655.9569 = -12,781.4264

Cumulative cash flow for year 4 = -12,781.4264 + 3,293.6549 = -9,487.7715

Cumulative cash flow for year 5 = -9,487.7715 + 2,967.2566 = -6,520.5149

Cumulative cash flow for year 6 = -6,520.5149 + 2,673.2042 = -3,847.3107

Cumulative cash flow for year 7 = -3,847.3107 + 2,408.29205 = -1,439.01865

Cumulative cash flow for year 8 = -1,439.01865 + 2,169.6325 = 730.61

1,439.01865 / 2,169.6325 = 0.66

Discounted payback period = 7 + 0.66 = 7.66 years