Calculate the payback period for each project. Determine whether it is meaningfu

Question

Calculate the payback period for each project. Determine whether it is meaningful to calculate a payback period for project D. Assuming that i = 12%, calculate the discounted payback period for each project.

Explanation / Answer

a) Payback periods : Project A = 4 + (3500-3200)/800 = 4.375 years Project B = 3 years as (2000+1500+1500 -5000 = 0) Project C = 3 + (7500-6000)/4000 = 3.375 years Project D = 4000/5000 = 0.8 years. b) It is not meaningful to calculate Payback period of Project D as there are negative flows or further investments in later years. c) Discounted Payback periods : Project A -3500+800(1.12^n-1)/(0.12*1.12^n) = 0 => n = 6.57 years Project B -5000 + 2000/1.12 + 1500/1.12^2+ 1500/1.12^3 +500/1.12^4+ 500/1.12^5 = -349 So, 5 years + part of 6 th year . Say around 5.5 years Project C -7500 + 2000/1.12+2000/1.12^2+2000/1.12^3+4000/1.12^4 = -154 So, it is 4 years + part of 5 th year = Say 4.2 years . Project D As explained in b) above, it is not meaningful to calculate payback period of this projrect.

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