Question

Project L requires an initial outlay at t = 0 of $25,000, its expected cash inflows are $5,000 per year for 9 years, and its WACC is 11%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places.

  years

Answer 1

Initial investment = 25000

Expected cash flows = 5000

Term of life = 9 years

Discount rate = 11%

Year	Cash flow	PV factor	Discounted cash flow	Cumulative cash flow
1	5000	0.90090	4504.50	4504.50
2	5000	0.81162	4058.11	8562.62
3	5000	0.73119	3655.96	12218.57
4	5000	0.65873	3293.65	15512.23
5	5000	0.59345	2967.26	18479.49
6	5000	0.53464	2673.20	21152.69
7	5000	0.48166	2408.29	23560.98

Till year 7 total cumulative discounted cash flow = 23560.98

Cash flow remaining to be recovered = 25000 - 23560.98 = 1439.02

Discounted cash flow of year 8 = 5000 / (1 + 11%)^8 = 2169.63

Time taken in year 8 to recover remaining amount = 1439.02 / 2169.63

= 0.66 years

Hence discounted payback period = 7 years + 0.66 years

= 7.66 years