An investment project costs $10,000 and has annual cash flows of $2,900 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,900 for six years.

What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the discounted payback period if the discount rate is 5 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

What is the discounted payback period if the discount rate is 19 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))

An investment project costs $10,000 and has annual cash flows of $2,900 for six years.

Explanation / Answer

A capital budgeting procedure used to determine the profitability of a project. In contrast to an NPV analysis, which provides the overall value of an project, a discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure. Future cash flows are considered are discounted to time "zero." This procedure is similar to a payback period; however, the payback period only measure how long it take for the initial cash outflow to be paid back, ignoring the time value of money.

1) zero percent

Discounted pay back period = 3.448 years

2) 5%

Discounted pay back period = 3.88 years

3) 19%

Discounted pay back period = 0 (never pays back)

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