Question

shannon co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project discount paycheck?

R+ 12.00%

Year 0 1 2 3

CF -$1000 $450 $425 $400 $410 $400

A. 2.07 year b. 2.30 year c. 2.52 yeas d. 2.78 years e 2.89 years

Answer 1

Answer: e. 2.89 years

Year	CF	PV @ 12%	Discounted Cash flows	Cumulative discounted cash flows
0	-1000	1	-1000.00	-1000.00
1	450	0.8929	401.81	-598.20
2	425	0.7972	338.81	-259.39
3	400	0.7118	284.72	25.34
4	410	0.6355	260.56	285.89
5	400	0.5674	226.96	512.85

Discounted Payback period = A + B/C
where A is the year with the last negative cumulative cash flow
B is the absolute value of the last negative cumulative cash flow
C is the discounted cash flow of the cocnsecutive year

Payback period = 2+ (259.39 / 284.72)
Payback period = 2.91 years (which is closest to 2.89 years. the difference is due to rounding off)