Question

You have developed the cash flows worksheet and found the following cash flows on a potential project: Time Cash Flow 0 - $3,500 1 $1,800 2 $1,200 3 $1,100 4 $1,000 Your firm has a cost of capital of 8%. What is the discounted payback period for this project?

Answer 1

amount to be recovered = $3,500.

year	cash flow	discounting factor @8%	discounted cash flow	cumulative discounted cash flow
1	$1,800	1/(1.08)=>0.92593	1800*092593=>1,666.674	1,666.674
2	$1,200	1/(1.08)^2=>0.85733	1200*0.85733=>1,028.796	2,695.47
3	$1,100	1/(108)^3=>0.79383	1100*0.79383=>873.213	3,568.683

the original investment of 3500 is recovered between 2 and 3 rd year.

precise point of discounted payback period :

2 nd year + (3500 - 2nd year cumulative cashflow) / 3rd year discounted cash flow

=> 2 nd year + (3500 - 2695.47) / 873.213

=>2ndyear + 804.53/873.213

=>2nd year + 0.92134

=>2.92 years........(rounded to two decimals).