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A project has an initial cost of $17,800 and produces cash inflows of $7,200, $8,900, and...

A project has an initial cost of $17,800 and produces cash inflows of $7,200, $8,900, and $7,500 over three years, respectively. What is the discounted payback period if the required rate of return is 16 percent?

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Answer #1

Discounted Payback Period is the time required to generate sufficient present value of future cash flow which equals the initial cost of the project.

Initial Cost = $17800

Required Rate of return = 16%

Year Future Cashflow    PV of Future Cashflow    Cumulative Cashflow Time Utilized
1 7200 7200/(1+0.16)^1 = 6206.90 6206.90 1
2 8900 8900/(1+0.16)^2 = 6614.15 12821.05 1
3 7500 7500/(1+0.16)^3 = 4804.93 17625.98 1

Cost to recover = 17800 - 17625.98 =174.02

We have utilized all the cash flows but still, the cost of capital is not recovered

Hence we need more than 3 years to cover the cost which is higher than the timeline of the project.

Discounted Payback period = More than 3 years

Hence this project should not be accepted.

Please let me know in case you have any queries and I will be happy to assist you.

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