Question

"You invest $7,900 now and receive $3,300 at the end of year 1, $3,100 at the end of year 2, $2,900 at the end of year 3, and so on. In what year do you break even on your investment? Use the discounted payback approach and assume an annual interest rate of 5.6%, compounded annually. Enter your answer as an integer."

Answer 1

Year	PVF @5.6%	Amount	Present value
1	0.9469696969	3300	3125
2	0.8967516069	3100	2779.93
3	0.8491965975	2900	2462.67

To use discounted payback method, we need to compute the present value of cash inflows first. Then, we compute the cumulative cash inflow to see when we reach at out initial investment.

Year	present value of cash inflows	Cumulative cash inflows
	3125	3125
	2779.93	5904.93
	2462.67	8367.60

As we can see, the initial investment is getting covered in the 3rd year.