If a project costs $100,000 and is expected to return $25,000 annually, what is
ID: 2468169 • Letter: I
Question
If a project costs $100,000 and is expected to return $25,000 annually, what is the conventional payback period (PBP)? What is the discounted payback period (DPBP) at i=10%?
For the discounted payback period, you don't have to show me the table. You can use the following format to show me what's in the table:
Period 0, Cash Flow for Period 0, Cost of Fund for Period 0, Ending cash balance for Period 0;
Period 1, Cash Flow for Period 1, Cost of Fund for Period 1, Ending cash balance for Period1;
...
Period n (when you find the positive ending cash balance), Cash Flow for Period n, Cost of Fund for Period n, Ending cash balance for Period n.
Explanation / Answer
PBP Time Amount Cumulative - (100,000.00) (100,000.00) 1.00 25,000.00 (75,000.00) 2.00 25,000.00 (50,000.00) 3.00 25,000.00 (25,000.00) 4.00 25,000.00 - 5.00 25,000.00 25,000.00 6.00 25,000.00 50,000.00 7.00 25,000.00 75,000.00 8.00 25,000.00 100,000.00 9.00 25,000.00 125,000.00 10.00 25,000.00 150,000.00 PBP= 4 Years Discounted PBP Time Amount PVf@10% PV Cumulative - (100,000.00) 1.00 (100,000.00) (100,000.00) 1.00 25,000.00 0.91 22,727.27 (77,272.73) 2.00 25,000.00 0.83 20,661.16 (56,611.57) 3.00 25,000.00 0.75 18,782.87 (37,828.70) 4.00 25,000.00 0.68 17,075.34 (20,753.36) 5.00 25,000.00 0.62 15,523.03 (5,230.33) 6.00 25,000.00 0.56 14,111.85 8,881.52 7.00 25,000.00 0.51 12,828.95 21,710.47 8.00 25,000.00 0.47 11,662.68 33,373.15 9.00 25,000.00 0.42 10,602.44 43,975.60 10.00 25,000.00 0.39 9,638.58 53,614.18 PBP = 5 + 5,230.33/14,111.85 PBP = 5.37 Years Approx
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