Question

Question 2 1 pts (2) Refer to the Capital Budgeting Narrative. What is the Payback Period of the project? Capital Budgeting Narrative: Aferin Electric is considering a new project. The initial investment required is $53,000 and the cost of capital is 8%. Expected cash flows over the next four years are given below. Years Cash Flow ($) 12,000 27.000 27,000 70,000 3.0 years 2.1 years 25 years 2.2 years 2.9 years

Answer 1

Cash Flows Discounted value factor Discounted value Cumm. Cash flows Investment still to be covered Year 1/(1+R)An where R 7% -53,000 -53,000.00 0 1 -53,000 -53,000.00 1 12,000 0.9259 11,111.11 11,111.11 -41,888.89 23,148.15 27,000 0.8573 34,259.26 -18,740.74 2,692.73 27,000 21,433.47 55,692.73 3 0.7938 1,07,144.82 54,144.82 4 70,000 0.7350 51,452.09 Discounted Payback period = Year before investment covered fully(Investment still to be covered/cash flow in the year fully covered)year Year before investment fully covered Year 2 Investment still to be covered in year 3 $18,740 Discounted Payback Period yr 2 ($18,740/ $21,433.47)yr Discounted Payback Period = yr 2 + 0.9yr (rounded to 1 decimal So,Discounted Payback period 2.9 years