Question

A project has the following total (or net) cash flows.

               ________________________________________

                Year         Total (or net) cash flow

               ________________________________________

1 $50,000
2 70,000
3 80,000
4 100,000
_______________________________________   

The required rate of return on the project is 13 percent. The initial investment (or initial cost or initial outlay) of the project is $100,000.
a) Find the (regular) payback period of the project.
b) Compute the discounted payback period of the project.

Answer 1

pay back period is timee in which we receive our investment

investment is 100000

year	cash flows	cumulative cash flows	discount factor @13%	dcf	cumulative dcf
1	50000	50000	0.8849	44245	44245
2	70000	120000	0.7831	54817	93972
3	80000	200000	0.693	55440	138600
4	100000	300000	0.6133	61330	183990

calculation of payback period

in year 1 we recover 50000 and we are going to recover 50000 in year 2

= 1+50000/70000 =1.7142 years

calculation of disounted payback period

= 2+6028/55440 =2.1087 years

pay back period do not take time value of money where as discounted pay back uses time value of money