Question

A project has an initial cost of $60,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 13%. What is the project's discounted payback period

Answer 1

Discounted payback period = 6.68 years

Step-by-step explanation:

Year Cash inflow$ Discounted cash Cumulative discounted

inflow$ cash inflow$

1 14,000 12,389 12,389

2 14,000 10,964 23,353

3 14,000 9,703 33,056

4 14,000 8,586 41,643

5 14,000 7,599 49,241

6 14,000 6,724 55,966

7 14,000 5,951 61,917

Discounted cash inflow is calculated by discounting cash inflow at 13%. For example, discounted cash-flow in year 1 = 14,000 / (1+13%)^1 = 12,389.

Similarly, discounted cash-flow in year 2 = 14,000 / (1+13%)^2 = 10,964. And so on.

Cumulative cash-flows are sum of all cashflows till that year. For example, year 2 cumulative cashflow = 12,389 + 10,964 = 23,353.

Similarly, year 3 cumulative cash-flow = 23,353 + 9,703 = 33,056.

This cumulative cash-flow crosses 60,000 in year 7, so discounted payback period = 6 + (60,000-55,966) / 5,951

Discounted payback period = 6.68 years