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You are considering a new project that will cost $750,000. The project is expected to generate...

You are considering a new project that will cost $750,000. The project is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $250,000 in year three, and $280,000 in year four. Your required rate of return is 8%. What is the discounted payback period of the project?

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Answer #1

Cost = 750000

Rate = 8%

Year Cashflow Present Value Cumulative Value Year Consumed
1 350000 350000/(1+0.08)^1 = 324074.07 324074.07 1
2 325000 325000/(1+0.08)^2 = 278635.12 602709.19 1
3 250000 250000/(1+0.08)^3 = 198458.06
4 280000 280000/(1+0.08)^4 = 205808.36

Cumulative value of 602709.19 is consumed in 2 years.

Remaining Value = 147290.81

Time required to generate remaining value = 147290.81 /198458.06 = 0.74

Discounted payback period of the project = 2.74 years Answer

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