Question

Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. The firm's cost of capital is 10 percent. What is the discounted payback period for this project

Answer 1

4.3 years

Step-by-step explanation:

The computation of the discounted payback period is shown below:

Year Cash flows Discount factor Present value Cumulative present value

0 -$1,250,000 1 -$1,250,000

1 $375,000 0.9090909090 $340,909.09 $340,909.0

2 $375,000 0.826446281 $309,917.36 $650826.45

3 $375,000 0.7513148009 $281,743.05 $932,569.50

4 $375,000 0.6830134554 $256,130.05 $1,188,699.54

5 $375,000 0.6209213231 $232,845.50 $1,421,545.04

Total $1,421,545.04

Now the discounted payback period is

= 4 years + ($1,250,000 - $1,188,699.54) ÷ $232,845.50

= 4.3 years