Question

coughlin motors is considering a project with the following expected cash flows.

Year Cash flow

0 (700)

1 200

2 370

3 225

4 700

The project's cost of capital is 10%. What is the project's discounted payback?

Answer 1

Solution:

Statement showing cummulative discounted cash flow:

Year	Cash flow(A)	Present value factor@10%(P)	Discounted cash flow(A*B)	Cummulative Discounted cash flow
0	(700)	1	(700)	(700)
1	200	0.9091	181.82	(518.18)
2	370	0.8264	305.768	(212.412)
3	225	0.7513	169.0425	(43.3695)
4	700	0.6830	478.10	434.7305

Payback Period=A+(B/C)

A=Last period with number with negative discounted cummulative cash flow

B=absolute value of discounted cummulative cash fow at the end of the year A

C=Discounted cash inflow during the period following Year A

Payback Period=3+(43.3695/478.10)

=3+09

=3.09 years