An investment project costs $10,000 and has annual cash flows of $2,860 for six
ID: 2715875 • Letter: A
Question
An investment project costs $10,000 and has annual cash flows of $2,860 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 4 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 21 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
An investment project costs $10,000 and has annual cash flows of $2,860 for six years.
Explanation / Answer
In first case, If the discount pay back percent is 4, then the Pay back period is calculated as:
Discounted payback period
Years
0
If discount rate is 4%,
Year (1)
CF (2)
PV$1=1/(1+I) n (3)
Discounted Cash Flow (4) = (2) * (3)
Cumulative Discounted cash flow
0
-10,000
1.00000
-10000.0000
-10000.0000
1
2,860
0.96154
2750.0044
-7249.9956
2
2,860
0.92456
2644.2416
-4605.7540
3
2,860
0.88900
2542.5400
-2063.2140
4
2,860
0.85480
2444.7280
381.5140
5
2,860
0.82193
2350.7198
2732.2338
6
2,860
0.79031
2260.2866
4992.5204
Discounted payback period = 3+ (-2063.2140/2444.7280) = 3+0.843 = 3.84 years
Discounted payback period
Years
3.84
If discount rate is 21%,
Year (1)
CF (2)
PV$1=1/(1+I) n (3)
Discounted Cash Flow (4) = (2) * (3)
Cumulative Discounted cash flow
0
-10,000
1.00000
-10,000
-10000.0000
1
2,860
0.82645
2363.5470
-7636.4530
2
2,860
0.68301
1953.4086
-5683.0444
3
2,860
0.56447
1614.3842
-4068.6602
4
2,860
0.46651
1334.2186
-2734.4416
5
2,860
0.38554
1102.6444
-1631.7972
6
2,860
0.31863
0911.2818
-720.5154
Discounted payback period = 0 years since the cumulative discounted cash flows shows negative value over the 6 years
Discounted payback period
Years
0
Discounted payback period
Years
0
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