Question

Nancy is considering buying 200 acres of land for $2,000,000, she expects to lease the land to a farmer which will result in profits of $75,000 in the first year, $500,000 for the next two years, and $550,000 in years 4 through 7. What is the discounted payback period on the land if Nancy’s required rate of return is 12%?

Answer 1

year	cash flows	pv@12%	DCF	cumulative DCF
1	75000	0.8929	66,964.29	66,964.29
2	500000	0.7972	398,596.94	465,561.22
3	550000	0.7118	391,479.14	857,040.36
4	550000	0.6355	349,534.94	1,206,575.30
5	550000	0.5674	312,084.77	1,518,660.07
6	550000	0.5066	278,647.12	1,797,307.19
7	550000	0.4523	248,792.07	2,046,099.26

initial investment is 2000000

discounted pay back is period in which we recover our initial investment using discounted cash flows

we recover our investment in between 6 to 7 years by using cumulative cash flows

discounted payback = 6+ (2000000-1797307.19)/248792.07 = 6.814years