Question

Shisman Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

WACC:	8.00%
Year	0	1	2	3
Cash flows	-$650	$400	$600	$600

Answer 1

Cash flows P.V.F. @ 8% Present value Cumulative cash flows

Year 0 -650. 1 -650.000 -650.00

Year 1 400 0.9259259259. 370.37037. -279.62963

Year 2 600 0.8573388203. 514.40329 234.77366

Year 3 600 0.793832241 476.29934. 711.07301

Total. 711.07301

Discounted payback period is time of years, at when cost of project is recovered fully and NPV at that point is Zero.

Cost of investment is $650.

In Year 2 it is negative and in year 3 it becomes positive.

Discounted cash back formula = Year just before Cumulative cash flows become positive + (Shortfall in NPV to become 0/Cash flow of year in which Cumulative cash flows become positive)

So, Discounted payback = 1 year + (279.6296/514.40329)

1.54

So, Discounted payback period is 1.54 Years.