Question

You are evaluating a project with an initial investment of $15.7 million dollars, and expected cash flows of $8 million dollars each for years 1-3. What is the project's simple payback? The corporate WACC is 11%.

Express your answer in years, rounded to 2 decimals. So, if your answer is 2.7654, then just enter 2.77.

Answer 1

Initial Investment = $ 15.7 million

Expected Cash Flow = $ 8 million for three years

WACC = 11%

Now Simple Payback is taken as the number of years taken to retrieve the cash investment

Payback = Cash Investment/Cash Inflow = 15.7/8

Simple Payback = 1.9625 or simply 1.96 years

Also, since WACC is given we can calculate discounted payback

Cash Inflow 1 = 8 million --> Discounted = 8/1.11 = 7.21

Cash Inflow 2 = 8 million --> Discounted = 8/(1.11)ˆ2 = 6.49

Cash Inflow 3 = 8 million --> Discounted = 8/(1.11)ˆ3 = 5.85

Initial Cash Investment = 15.7 Million

We have after first two year --> 7.21+ 6.49 = 13.7 million

2 more millions left to be recovered after the first 2 years Then remaining years = 2/5.85 =0.34

Then total 2.34 years