Question

3. There is a high risk, high reward investment opportunity avalible to your company. The potential return is $950,000 after 4 years for an initial investment of $295,000. Due to the high risk involved, your company has assiged a discount rate of 18%.

Calculate the payback period

Answer 1

Initial investment = $295,000

Potential return = $950,000

Interest rate = 18%

Time period = 4 years

Calculate the annual worth of potential return -

Annual worth = $950,000(A/F, i, n)

Annual worth = $950,000(A/F, 18%, 4)

Annual worth = $950,000 * 0.19174

Annual worth = $182,153

Calculate the payback period -

Payback period = Initial investment/Annual worth

Payback period = $295,000/$182,153

Payback period = 1.61 years

The payback period is 1.61 years or approximately 1 year and 6 months.