Question

FJD firm uses discounted payback to assess projects and the firm wants to have a discounted payback of 7 years of less. They now have a new project that can generate a constant annual payment forever and costs $23237. The cost of borrowing is 2% per year for the project. Calculate the minimum amount for the annual payment that would satisfy FJD firm's liquidity concern?

Answer 1

Sol:

Annual payment (P) = $23,237

Borrowing cost (r) = 2%

Payback period = 7 years

To calculate the minimum amount for the annual payment that would satisfy FJD firm's liquidity concern:

Minimum payment = P x r x (1 + r )^n / (1 + r)^n - 1

Minimum payment = 23237 x 2% x (1 + 2%)^7/ (1 + 2%)^7 - 1

Minimum payment = 23237 x 0.02 x (1 + 0.02)^7/ (1 + 0.02)^7 - 1

Minimum payment = 23237 x 0.02 x (1.02)^7/ (1.02)^7 - 1

Minimum payment = $3,590.40

Therefore minimum amount for the annual payment that would satisfy FJD firm's liquidity concern will be $3,590.40