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Consider a project with an initial outlay of $12,000 and yearly cash flows as follows: -3,000;...

Consider a project with an initial outlay of $12,000 and yearly cash flows as follows: -3,000; 1,500; -700; 4,000; 8,000; 5,000; 3,500; 4,000; 2,800; 3,000; and 2,000; Obtain the cost adjusted payback period assuming 8% cost of funds. (EXPLAIN HOW TO SOLVE ON CALCULATOR OR SHOW MATHEMATICAL WORKING) (NO EXCEL)

a. 6.75

b. 6.91

c. 7.22

d. 7.48

e. None of the above

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Answer #1
Year Cashflows PVF at 8% Present value Cumulative CF
0 -12000 1 -12000 -12000
1 -3000 0.925926 -2777.78 -14777.8
2 1,500 0.857339 1286.008 -13491.8
3 -700 0.793832 -555.683 -14047.5
4 4000 0.73503 2940.119 -11107.3
5 8000 0.680583 5444.666 -5662.67
6 5000 0.63017 3150.848 -2511.82
7 3,500 0.58349 2042.216 -469.603
8 4000 0.540269 2161.076 1691.473
9 2800 0.500249 1400.697 3092.17
10 3000 0.463193 1389.58 4481.75
11 2000 0.428883 857.7657 5339.516
Payback period = 7 yrs + 469.60/2161.08 = 7.22 yrs
Answer is c. 7.22
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