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)) Discounted payback period years 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)) Discounted payback period years What is the discounted payback period if the discounted rate is 20 percent' (Enter 0 if the project never pays back. Round your answer to 2 decimal places, (e.g.. 32.16)) Discounted payback period years

Explanation / Answer

Calculating Discounted Payback Period

Part – A: Discount Rate = 0%

Discounted Payback Period = A +B/C where A = last time period with negative cash flow, B= absolute value of cumulative cash flow at the end of period A and C= Total cash flow during period following A.

Year

Cash Flow

Cumulative Cash Flow

0

-10000

-10000

1

2910

-7090

2

2910

-4180

3

2910

-1270

4

2910

1640

5

2910

4550

6

2910

7460

Discounted Payback period = 3+ (1270/ 2910) = 3 +0.44 = 3.44 Years

Part – B: Discount Rate = 6%

Year

Cash Flow

Discounted Cash Flow at 6%

Cumulative Cash Flow

0

-10000

-10000

-10000

1

2910

2745.283019

-7254.716981

2

2910

2589.88964

-4664.827341

3

2910

2443.292114

-2221.535227

4

2910

2304.99256

83.45733296

5

2910

2174.521283

2257.978616

6

2910

2051.435173

4309.413789

Discounted Payback period = 3+ (2221.54/ 2304.99) = 3 +0.96 = 3.96 Years

Part – C: Discount Rate = 20%

Year

Cash Flow

Discounted Cash Flow

Cumulative Cash Flow

0

-10000

-10000

-10000

1

2910

2425

-7575

2

2910

2020.833333

-5554.166667

3

2910

1684.027778

-3870.138889

4

2910

1403.356481

-2466.782407

5

2910

1169.463735

-1297.318673

6

2910

974.5531121

-322.7655607

Here we can see that even after 6 years, the cumulative cash flow is negative. Therefore project never pays back.

Discounted Payback period = 0

Year

Cash Flow

Cumulative Cash Flow

0

-10000

-10000

1

2910

-7090

2

2910

-4180

3

2910

-1270

4

2910

1640

5

2910

4550

6

2910

7460

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