An investment project costs $10,000 and has annual cash flows of $2,910 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,910 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))

What is the discounted payback period if the discount rate is 6 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 20 percent?

An investment project costs $10,000 and has annual cash flows of $2,910 for six years.

Explanation / Answer

The first one is correct, 3.43 years at 0%.

The second is not the same as the first. It is 3.96 years at 6%. The discounted payback is always longer than the payback, unless the discount rate is 0.

If discounted at 20% a discounted payback is never achieved, because the present value of those cash flows is only $9,677.23, which is less than the original investment of $10,000. Following their instructions, the answer is 0.

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