Question

An investment project costs $10,000 and has annual cash flows of $2,820 for six years. a. What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the discounted payback period if the discount rate is 4 percent? (Enter 0 if the project never pays back. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the discounted payback period if the discount rate is 19 percent? (Enter 0 if the project never pays back. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: a). 3.55 years b). 3.90 years

c). 6 years

Explanation:a). A discount rate of 0% gives exactly the same amount when the cash flow is not discounted. For the project; cash flow of 3 years will give $2,820 × 3 =$ 8460

$10000 - $8460 = 1540

$1540/$2820 = 0.55

Therefore, discounted payback period = 3.55 years

b). At a dicount factor of 4%, the discounted cash flow will be $(2711.43 + 2607.37 + 2506.98) = $7825.78

$(10000 - 7835.78 )= 2174.22

$2174.22/$2410.54 =0.90

Therefore discounted payback period at 4% = 3.90 years

c). At a discounted rate of 19%, the cashflow per year reduces further. The discounted payback period will be 6 years. That is, $(2369.75 + 1991.38 + 1673.39 + 1406.24 + 1181.72 + 993.94) = $9615.52