Question

An investment project generates after-tax cash flows of $5,000 per year for the next 10 years. Suppose the payback period for the project is 5 years and the appropriate discount rate is 15 percent. What is the initial cost of the project?

a. $25,000 b. $32,167 c. $30,000 d. $16,761

Please provide the formula you used and numbers you plugged in to get the answer.

Answer 1

Answer to Question is Option"a" i.e "$25,000"

We are considering the Payback Period without the effect of Discounting Factor as the Payback Period with Discounting Factor is called "Discounting Payback Period".

Since the Pay Back Period is 5 Years, it means the Amount Invested as "Initial Cost of the Project" will be recovered at the end of 5 Years, if we have the after-tax cash inflows $5000 per year then we will recover $5000 Per Year X 5 Years = $ 25,000 in total. So the formula is "After-Tax Cash Inflow X Payback Period"

1. After-Tax Cash Inflows = $ 5,000

2. Payback Period = 5 Years

Initial Cost of Projects = $ 25,000 ($5,000 X 5)