Question

Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent. Year 4 Cash Flows $-44300 $11950 2 $13350 3 $19000 $8000 $3000 The discounted payback period is 0.16 year longer than the payback period. 0.80 year longer than the payback period. 1.40 years longer than the payback period. 1.85 years longer than the payback period.

Answer 1

1.40 years longer than the payback period

Step-1:Payback period
Year	Cash Flow	Cumulative Cash Flow
0	$       -44,300	$ -44,300
1	11,950	-32,350
2	13,350	-19,000
3	19,000	-
4	8,000	8,000
5	3,000	11,000
So,Payback period is 3 years
Step-2: Discounted Payback period
Year	Cash Flow	Discount factor	Discounted Cash flow	Cumulative Discounted Cash flow
a	b	c=1.08^-a	d=b*c	e
0	$       -44,300	1.0000	-44,300	$ -44,300
1	11,950	0.9259	11,065	-33,235
2	13,350	0.8573	11,445	-21,790
3	19,000	0.7938	15,083	-6,707
4	8,000	0.7350	5,880	-827
5	3,000	0.6806	2,042	1,215
Discounted payback	=	4+(827/2042)
	=	4.40	Years
Payback period		3 years
Discounted payback period		4.40 years
So, discounted payback period is longer than 1.40 years.