Question

A project that requires an initial investment of $100,000 and generates the following cash flows:

YEAR	CASH FLOWS
1	30,000
2	35,000
3	40,000
4	20,000
5	19,000

If the cost of capital is 8.5% have a discounted payback period of _______________

Answer 1

Cumulative PV of Cash Flow = Previous cash flow + PV of Current Cash flow

Discount rate	8.50%
Year	Cash Flow	PV of Cash Flow = Cash Flow/(1+0.085)^Year	Cumulative PV of Cash Flow
0	-100000	-100000	-100000
1	30000	27649.76959	-72350.23041
2	35000	29730.93504	-42619.29538
3	40000	31316.32394	-11302.97144
4	20000	14431.48569	3128.514246
5	19000	12635.86304	15764.37729

The discounted payback period is between years 3 and 4 as there the cumulative cash flow becomes positive.

At the end of year 3 money left for recovery = -11302.97144

On year 4 the PV of annual CF = 14431.48569

So time required to recover the left amount = 11302.97144/14431.48569 = 0.783 year = 10 months (approx)

If the cost of capital is 8.5% have a discounted payback period of 3 years 10 months.