Question

Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7 percent and the maximum allowable discounted payback period is three years. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project C
Time:	0	1	2	3	4	5
Cash flow:	–$2,300	$1,000	$870	$910	$560	$360

Discounted payback period

years

Answer 1

Present value of year 1 cash flow = 1,000 / (1 + 0.07) = 934.5794

Present value of year 2 cash flow = 870 / (1 + 0.07)² = 759.8917

Present value of year 3 cash flow = 910 / (1 + 0.07)³ = 742.8311

Present value of year 4 cash flow = 560 / (1 + 0.07)⁴ = 427.2213

Present value of year 5 cash flow = 360 / (1 + 0.07)⁵ = 256.6750

Cumulative cash flow for year 0 = -2,300

Cumulative cash flow for year 1 = -2,300 + 934.5794 = -1,365.4206

Cumulative cash flow for year 2 = -1,365.4206 + 759.8917 = -605.5289

Cumulative cash flow for year 3 = -605.5289 + 742.8311 = 137.3022

605.5289 / 742.8311 = 0.82

Discounted payback period = 2 + 0.82 = 2.82 years