An investment project costs $10,000 and has annual cash flows of $2,830 for six

Question

An investment project costs $10,000 and has annual cash flows of $2,830 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 4 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 21 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

At 0%

Discounted payback=intial investment/annual cash flows

=(10,000/2830)=3.53 years

At 4%

This would continue for upto 6 years

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(2146.5/2419.1)=3.89 years

At 21%:

Hence discounted payback =0

Year Cash flows Present value@4% Cumulative Cash flows 0 (10000) (10000) (10000) 1 2830 2721.15 (7278.85) 2 2830 2616.49 (4662.36) 3 2830 2515.86 (2146.5) 4 2830 2419.10 272.60

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