Question

Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box. WACC: 11% Year: 0 1 2 3 Cash flows: -$1,100 $550 $550 $550

Answer 1

Year	0	1	2	3
Cashflow(in $)	(1,100.00)	550.00	550.00	550.00
PVF @11%	1.000	0.901	0.812	0.731
Discounted Cashflow (Cash flow * PVF)	(1,100.00)	495.50	446.39	402.16
Cumulative Cashflow(in $)	(1,100.00)	(604.50)	(158.11)	244.04

Discounted Payback Period = A + (B/C)

where

A -  last time period where the cumulative discounted cash flow was negative

B - absolute value of the CCF at the end of that period A

C - value of the DCF in the next period after A

Discounted Payback Period = 2+(158.11/402.16)

= 2.39 years