An investment project costs $10,000 and has annual cash flows of $2,840 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,840 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 5 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? (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 $2,840 for six years.

Explanation / Answer

Solution(1) Discounted payback period if the discount rate is zero percent= Initial payment/annual cash flow

=$10,000/$2840 = 3.5 years approx

(2) Discounted payback period if the discount rate is 5 percent

Discounted Payback period:- 3 +|-2266|/2337 =3.97 years approx

(3) Discounted payback period if the discount rate is 20 percent

Since cash flow is still not return during the project duration so the project is not accepted if discounted rate of return is 20% here Discounted Payback period is more than 6 years.

Year Cashflow PVF@5% Discounted Cash Flow Cumulative Discounted Cash Flow 0 -10,000 1 -10,000 -10,000 1 2840 0.952 2704 -7296 2 2840 0.907 2576 -4720 3 2840 0.864 2454 -2266 4 2840 0.823 2337 71 5 2840 0.784 2227 2298 6 2840 0.746 2119 4417

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