Question

Suppose a company has proposed a new 5-year project. The project has an initial outlay of $169,000 and has expected cash flows of $38,000 in year 1, $45,000 in year 2, $60,000 in year 3, $69,000 in year 4, and $77,000 in year 5. The required rate of return is 13% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

Answer 1

Year	Cash flows	Present value@13%	Cumulative Cash flows
0	(169000)	(169000)	(169000)
1	38000	33628.32	(135371.68)
2	45000	35241.60	(100,130.08)
3	60,000	41583.01	(58547.07)
4	69000	42318.99	(16228.08)
5	77000	41792.52	25564.44(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).

=4+(16228.08/41792.52)

=4.4 years(Approx).