An investment project costs $10,000 and has annual cash flows of $2,870 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,870 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.) Discounted payback period What is the discounted payback period i the discount rate is 5 peroent? (Enter O if the project never paye years back. Round your answer to 2 decimal places, e.g, 32.16.) Discounted payback period years What is the discounted payback period if the discount rate is 20 percent? (Enter O if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.) esant sayteack perñiodrers Hints References eBook & Resources Hint #1 Hint#2

Explanation / Answer

1.

In case of zero discount rate, the present value of annual cash flows shall be same as the cash flows. Hence, discounted payback period shall be same as the payback period.

Discounted payback period = Investment cost/Annual cash flows

Discounted payback period = $10,000/$2,870 = 3.48 years

2.

Year

Cash flows

Present value factor at 5%

Present value of cash flows

Cumulative present value of cash flows

1

$2,870

0.95238

$2,733.33

$2,733.33

2

$2,870

0.90703

$2,603.17

$5,336.51

3

$2,870

0.86384

$2,479.21

$7,815.72

4

$2,870

0.82270

$2,361.16

$10,176.88

5

$2,870

0.78353

$2,248.72

$12,425.60

6

$2,870

0.74622

$2,141.64

$14,567.24

Discounted payback period = 3 years + ($10,176.88-$10,000)/$2,361.16 = 3.07 years

3.

Year

Cash flows

Present value factor at 20%

Present value of cash flows

Cumulative present value of cash flows

1

$2,870

0.83333

$2,391.67

    $2,391.67

2

$2,870

0.69444

$1,993.06

    $4,384.72

3

$2,870

0.57870

$1,660.88

    $6,045.60

4

$2,870

0.48225

$1,384.07

    $7,429.67

5

$2,870

0.40188

$1,153.39

    $8,583.06

6

$2,870

0.33490

$961.16

    $9,544.21

Only $9,544.21 can be recovered over the 6 year life of the project

Hence, Discounted payback period = 0

Year

Cash flows

Present value factor at 5%

Present value of cash flows

Cumulative present value of cash flows

1

$2,870

0.95238

$2,733.33

$2,733.33

2

$2,870

0.90703

$2,603.17

$5,336.51

3

$2,870

0.86384

$2,479.21

$7,815.72

4

$2,870

0.82270

$2,361.16

$10,176.88

5

$2,870

0.78353

$2,248.72

$12,425.60

6

$2,870

0.74622

$2,141.64

$14,567.24

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.