Question

Calculating Discounted Payback [LO3] An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if the initial cost is $5,400? What if it is $10,400?

Answer 1

Initial cost is $5,200?

Year	Cash Flow	PV factor	PV	Cumulative PV
0	-5200	1.0000	-5,200.00	-5,200.00
1	2800	0.8772	2,456.14	-2,743.86
2	3700	0.7695	2,847.03	103.17
3	5100	0.6750	3,442.35	3,545.52
4	4300	0.5921	2,545.95	6,091.47

=+2743.86/2847.03+1

=1.96 years

initial cost is $5,400

Year	Cash Flow	PV factor	PV	Cumulative PV
0	-5400	1.0000	-5,400.00	-5,400.00
1	2800	0.8772	2,456.14	-2,943.86
2	3700	0.7695	2,847.03	-96.83
3	5100	0.6750	3,442.35	3,345.52
4	4300	0.5921	2,545.95	5,891.47

=+96.83/3345.52+2

=2.03

What if it is $10,400?

Year	Cash Flow	PV factor	PV	Cumulative PV
0	-10400	1.0000	-10,400.00	-10,400.00
1	2800	0.8772	2,456.14	-7,943.86
2	3700	0.7695	2,847.03	-5,096.83
3	5100	0.6750	3,442.35	-1,654.48
4	4300	0.5921	2,545.95	891.47

=+1654.48/2545.95+3

=3.65