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A project has an initial cost of $6,000 and has annual cash inflows of $1,725, $2,165,...

A project has an initial cost of $6,000 and has annual cash inflows of $1,725, $2,165, $2,281, and $2,624 in years 1-4. Assuming a 15% discount rate, find the following for the project.

1. Payback period

2. Discounted payback period

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Answer #1

1.

Year Cash flows Cumulative Cash flows
0 (6000) (6000)
1 1725 (4275)
2 2165 (2110)
3 2281 171
4 2624 2795

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

=2+(2110/2281)

=2.93 years(Approx)

2.

Year Cash flows Present value@15% Cumulative Cash flows
0 (6000) (6000) (6000)
1 1725 1500 (4500)
2 2165 1637.05 (2862.95)
3 2281 1499.79 (1363.16)
4 2624 1500.28 137.12

Hence discounted payback=3+(1363.16/1500.28)

=3.91 years(Approx).

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