An investment project costs $10,000 and has annual cash flows of $2,890 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,890 for six years.

What is the discounted payback period if the discount rate is zero percent?

What is the discounted payback period if the discount rate is 4 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 21 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 zero percent?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A: When Discount Rate is 0

Discounted Payback Period = Initial Investment/Annual Cash Inflows = 10000/2890 = 3.46 Years

Part B: When Discount Rate is 4%

The initial investment of 10000 will get recovered as follows:

Year 1 = 2778.85

Year 2 = 2671.97

Year 3 = 2569.20

and the balance of 1979.99 (10000 - 2778.85 - 2671.97 - 2569.20) between Year 3 and Year 4

Discounted Payback Period = 3 + 1979.99/2470.38 = 3.80 Years

Part C:When Discount Rate is 21%

The total of discounted cash flows comes out to be 9376.94 which is less than the initial investment of 10000. It indicates the investment is not  recovered during the life of the project. Discounted Payback Period would be 0 in this case.

Discounted Payback Period = 0.

Thanks.

Annual Cash Inflow Discounted Cash Inflow Year 1 2890 2778.85 Year 2 2890 2671.97 Year 3 2890 2569.20 Year 4 2890 2470.38 Year 5 2890 2375.37 Year 6 2890 2284.01

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