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

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0
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1
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2
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1 $2,000
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Year Cash
Flow
0
-$100,000
1
30,000
2
40,000
3
60,000
4
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0
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0
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1
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2
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