Question

Find the Discounted Payback period for the following project. The discount rate is 6%

	Project X
Initial Outlay	$8,148
Year 1	$3,065
Year 2	$3,825
Year 3	$5,138
Year 4	$6,849

Round the answer to two decimal places.

Answer 1

Present value of year 1 cash inflow = 3,065 / (1 + 0.06) = 2,891.5094

Present value of year 2 cash inflow = 3,825 / (1 + 0.06)² = 3,404.2364

Present value of year 3 cash inflow = 5,138 / (1 + 0.06)³ = 4,313.9639

Present value of year 4 cash inflow = 6,849 / (1 + 0.06)⁴ = 5,425.0495

Cumulative cash inflow for year 0 = -8,148

Cumulative cash inflow for year 1 = -8,148 + 2,891.5094 = -5,256.4906

Cumulative cash inflow for year 2 = -5,256.4906 + 3,404.2364 = -1,852.2542

Cumulative cash inflow for year 3 = -1,852.2542 + 4,313.9639 = 2,461.7097

1,852.2542 / 4,313.9639 = 0.43

Discounted payback period = 2 + 0.43 = 2.43 years