Question

1. Payback period

a.) Project K costs $40,000, its expected cash inflows are $10,000 per year for 7 years, and its WACC is 14%. What is the project's payback? Round your answer to two decimal places.

________ years

b.) Project K costs $50,000, its expected cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project's discounted payback? Round your answer to two decimal places.

________ years

*** Will you guys please show me how you got your answer mathmatically rather than through excel - this will help me better understand how to solve for each. Thank you!

Answer 1

a.Payback period=Initial investment/Annual cash flows

=(40000/10000)=4 years.

b.

Year	Cash flows	Present value@12%	Cumulative Cash flows
0	(50000)	(50000)	(50000)
1	12000	10714.29	(39285.71)
2	12000	9566.33	(29719.38)
3	12000	8541.36	(21178.02)
4	12000	7626.22	(13551.80)
5	12000	6809.12	(6742.68)
6	12000	6079.57	(663.11)
7	12000	5428.19	4765.08
8	12000	4846.60	9611.68(Approx).

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=6+(663.11/5428.19)

=6.12 years(Approx).