Question

4. Nugent Communication Corp. is investing $8,627,975 in new technologies. The company expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years. Year 1 2 3 4-7 Cash Flows $1,955,295 $4,494,443 $4,085,103 $968,125 What is the discounted payback period for the project assuming a discount rate of 10 percent?

Answer 1

Investment Amount = $8,627,975

Interest Rate = 10%

For Discounted Payback Period,

Discounting Cash flows,

In Year 1, Discounted Cash Flow = 1955295/(1.1) = $1,777,540,91

In Year 2, Discounted Cash Flow = 4494443/(1.1)² = $3,714,415.70

In Year 3, Discounted Cash Flow = 4085103/(1.1)³ = $3,069,198.35

In Year 4, Discounted Cash Flow = 968125/(1.1)⁴ = $661,242.40

Discounted Payback Period = 1($1,777,540,91) + 1($3,714,415.70) + 1($3,069,198.35) + 0.101(66821/661242.40)

Discounted Payback Period = 3.101 years