Question

The American Pharmaceutical Company​ (APC) has a policy that all capital investments must have a four​-year or less discounted payback period in order to be considered for funding. The MARR at APC is 8​% per year. Is the above project able to meet this benchmark for​ funding?

End of Year   Cash Flow, $
0   -290,000
1   -45,000
2   60,000
3   180,000
4   260,000
5   330,000
6-10   110,000

A) The payback period is how many years? B) Does the project meet the benchmark?

Answer 1

A)	3.72 years
Working:
Year	Cash flow	Discount factor	Present value	Cumulative present value
a	b	c=1.08^-a	d=b*c	e
0	-2,90,000.00	1.0000	-2,90,000.00	-2,90,000.00
1	-45,000.00	0.9259	-41,666.67	-3,31,666.67
2	60,000.00	0.8573	51,440.33	-2,80,226.34
3	1,80,000.00	0.7938	1,42,889.80	-1,37,336.53
4	2,60,000.00	0.7350	1,91,107.76	53,771.23
5	3,30,000.00	0.6806	2,24,592.46	2,78,363.68
6	1,10,000.00	0.6302	69,318.66	3,47,682.34
7	1,10,000.00	0.5835	64,183.94	4,11,866.29
8	1,10,000.00	0.5403	59,429.58	4,71,295.86
9	1,10,000.00	0.5002	55,027.39	5,26,323.25
10	1,10,000.00	0.4632	50,951.28	5,77,274.53
Discounted payback period		=	3+(137336.53/191107.76)
		=	3.72	Years
B)	Yes
As the discounted payback period is within time allowed of 4 years, it meets the benchmark.