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

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________________________________________
Year Total (or net)
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________________________________________
1 $50,000
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3 80,000
4 100,000
_______________________________________
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