Question

Problem 10.21 (Excel Video)

Oriole Communication Corp. is investing $10,091,700 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years.

Excel Template
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	Year
		1		2		3		4-7
Cash Flows		$1,844,000		$4,768,000		$4,204,100		$1,142,500

What is the discounted payback period for the project assuming a discount rate of 10 percent? (Round answer to 2 decimal places, e.g. 15.25. If discounted payback period exceeds life of the project, enter 0 for the answer.)

The discounted payback period for the project is_____ years.

Answer 1

Present Value of Cash Flow in Year 1 = 1,844,000/(1.10) = $1,676,364

Present Value of Cash Flow in Year 2 = 4,768,000/(1.10)² = $3,940,496

Present Value of Cash Flow in Year 3 = 4,204,100/(1.10)³ = $3,158,603

Present Value of Cash Flow in Year 4 = 1,142,500/(1.10)⁴ = $780,343

Present Value of Cash Flow in Year 5 = 1,142,500/(1.10)⁵ = $709,403

Present Value of Cash Flow in Year 6 = 1,142,500/(1.10)⁶ = $644,911

Discounted Payback Period is the time in which initial Cash Flows comes back as cash inflow,

Discounted Payback period = 1(1,676,364) + 1(3,940,496) + 1(3,158,603) + 1(780,343) + 0.76(535,894/709,403)

Discounted Payback period = 4.76 years