Question

The board of directors just approved an $18 million engineering construction design contract. The services are expected to generate new annual net revenue of $3 million. The contract has a potentially lucrative repayment clause or cancellation value (CV) of $3 million paid to the directors at any time the contract is canceled during the 10 years of the contract period. Calculate the payback period, assuming a cancelled contract with the CV occurring at the payback period. Use MARR = 10%. Round your response to the nearest tenth of a year.

Answer 1

YEAR NET REVINUE (MILLION) DISCOUNTING RATE PRESENT VALLUE (PV) CUMULATIVE PV

0 ( 18) 1   

1 3 0.909 2.97 2.97

2 3 0.826 2.478 5.448

3 3 0.751 2.253 7.701

4 3 0.683 2.049 9.750

5 3 0.620 1.86 11.610

6 3 0.564 1.692 13.302

7 3 0.513 1.539 14.841

8 3 0.466 1.398 16.239

9 3 0.424 1.272 17.511

10 3 0.386 1.158 18.669

     

CASH OUTFLOW 18 MILLION

IN 9TH YEAR CUMULATIVE CASH FLOW 17.511 MILLION

REQUIRED CASH FLOW TO RECOVER OUT FLOW IS 18-17.511 =0.489 MILLION

SO TIME PERIOD TO RECOVER THE ABOVE AMOUNT IS 12 MONTH/ $1.158 MILLION *$0.489 MILLION = 5.06 MONTH SO TOTAL TIME REQUIRED IS 9YRS 5 MONTH AND 6 DAY.