Question

The GAP Inc. is considering hiring a new mascot for its Old Navy subsidiary. They will shoot the commercials today and run them over the next four years. What is the discounted payback period of the investment if it requires an investment of $70,000 and provides cash flows of $20,000, $10,000, $50,000, and $30,000? Assume that the cash flows are received at the end of each year (not continuously) and that the appropriate discount rate is 10%. Round your answer, if appropriate, to two decimal places.

Answer 1

Given:

Cash outflow: $70,000
PVF @ 10%

Year	Cashflow	PVF @10%	Discounted Cash Flow	Cumulative Cash Flow
1	20,000	0.9091	18,182	18,182
2	10,000	0.8264	8,264	26,446
3	50,000	0.7513	37,565	64,011
4	30,000	0.6830	20,490	84,501

Till 3 year, $64,011 will be received and now left over amount i.e. 70,000 - 64,011 = $5,989
So, it will recover by:


= 3year + 5989 / 20,490
= 3year + 0.2922 or 0.29 (taken two decimal points)

So, total payback year 3 year + 0.292
= 3.292 years

the discounted payback period of the investment is 3.29 years