Question

9-59 Two equipment investments are estimated as follows:

Year	A	B
0	-15,000	-18,000
1	5,000	6,500
2	5,000	6,500
3	5,000	6,500
4	5,000	6,500
5	5,000	6,500

Which investment has the better discounted payback period if interest = 14%

Answer 1

Equipment A:

Col 1	Col 2	Col 3	Col 4	Col 5
Year	Cash flows ($)	Present Value Factor (P/F, 14%, n)	Discounted Cash Flow Col 2 * Col 3	Cumulative Discounted cash flows($)
0	-15000	1.0000	-15000.00	-15000.00
1	5000	0.8772	4386.00	-10614.00
2	5000	0.7695	3847.50	-6766.50
3	5000	0.6750	3375.00	-3391.50
4	5000	0.5921	2960.50	-431.00
5	5000	0.5194	2597.00	2166.00

Discounted payback period = 4 + |-431| / 2597 = 4 + (431 / 2597) = 4 + 0.17 = 4.17 years

Equipment B:

Col 1	Col 2	Col 3	Col 4	Col 5
Year	Cash flows ($)	Present Value Factor (P/F, 14%, n)	Discounted Cash Flow Col 2 * Col 3	Cumulative Discounted cash flows($)
0	-18000	1.0000	-18000.00	-18000.00
1	6500	0.8772	5701.80	-12298.20
2	6500	0.7695	5001.75	-7296.45
3	6500	0.6750	4387.50	-2908.95
4	6500	0.5921	3848.65	939.70
5	6500	0.5194	3376.10	4315.80

Discounted payback period = 4 + |-939.70| / 3376.10 = 4 + (939.70 / 3376.10) = 4 + 0.28 = 4.28 years

Thus, investment A has the better discounted payback period.