Find the discounted Payback period for the following project. The discount rate

Question

Find the discounted Payback period for the following project. The discount rate is 10% Project X Initial outlay $                 16,653.00 Year 1 $                   5,705.00 Year2 $                   5,828.00 Year 3 $                   5,805.00 Year 4 $                   8,932.00 Round the answer two decimal places Find the discounted Payback period for the following project. The discount rate is 10% Project X Initial outlay $                 16,653.00 Year 1 $                   5,705.00 Year2 $                   5,828.00 Year 3 $                   5,805.00 Year 4 $                   8,932.00 Round the answer two decimal places

Explanation / Answer

I'll explain the steps with the help of a table.

Since the initial amount of $16,653.00 is a cash outflow, I am assuming this number as a negative indicating that its a cash outflow. All the other amounts are cash inflows so these would be taken as a positive number.

Here we have to calculate when we get back our initial investment, i.e. we have to add the present values of all future cash inflows to the inital cash outflow and have to find out in how many years sum of inflows and outflows is exactly zero.

So from above it is clear that we are getting our invedstment back after year 3 but before the end of year 4. To arrive at the exact time period divide remaining amount (2,288.73) with the total return in year 4 (6,100.68).

2,288.73 / 6,100.68 = 0.38

So we discounted payback period is 3 + 0.38 = 3.38 years.

Year Outflow Present Value Cummulative Sum 0 -16,653.00 -16,653.00 -16,653.00 1 5,705.00 5,186.36 -11,466.64 2 5,828.00 4,816.53 -6,650.11 3 5,805.00 4,361.38 -2,288.73 4 8,932.00 6,100.68 3,811.95

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