Question

King Fisher Aviation is evaluating an investment project with the following case flows:

$6,000

$5,500

$7,000

$8,000

Discount rate 14 percent

What is the discounted payback period for these cash flows if the initial cost is 15,000? What if the initial cost is $12,000? What if the cost is $16,000?

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Answer 1

I have assumed that cash flows have been received at the the end of the first year so the rate of discounting has been applied from the first year-

Discounted Cashback period will be calculated in how many years the initial cash outlays will be equated with the total discounted present value of cash inflows.

Year	Cash flows	Discounting @14%	Discounted present value	Cumulative DCF
1	6000	.8771	5262.6	5262.6
2	5500	.7694	4231.7	9494.3
3	7000	.6749	4724.3	14218.6
4	8000	.5921	4736.8	18955.4

1. Discounted payback period if initial investment is $15000

= 3 years +[(15000-14218.6)/4736.8]

= 3 years+.1649

=3.1649 Years

2. Discounted payback period if initial investment is $ 12000

= 2 years+[( 12000-9494.3)/4724.3]

=2 years+.5303

= 2.5303 Years

3. Discounted payback period if initial investment is $ 16000

= 3 years+[( 16000-14218.6)/4736.8]

= 3 years+.376

= 3.376 years