Gadgetron is considering a project that requires an initital investment of $450,
ID: 2700913 • Letter: G
Question
Gadgetron is considering a project that requires an initital investment of $450,000. The company's CFO wants to know how long it will take to recover its initial investment in the project. The project's expected net cash flows are as follows:
Year 1 $275,000
Year 2 $475,000
Year 3 $400,000
1. What is the prject's payback period?
2. What is the company's discounted payback period? Assume the WACC is 8%.
3 The discounted payback period will always be ____________ (longer or shorter) that the regular payback period.
Explanation / Answer
1. What is the project's payback period?
Project's payback period = 1 + 175000/475000 = 1.3684 = 1.37 year
2. What is the company's discounted payback period? Assume the WACC is 8%.
Discounted payback period = 1 + 195370.37/407235.94 = 1.4797 = 1.48 Year
3 The discounted payback period will always be Longer than the regular payback period.
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