Question

Project L costs $65,000, its expected cash inflows are $15,000 per year for 8 years, and its WACC is 10%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places.

_____ years

Answer 1

Computation of discounted payback Year Initial investment Cash Flows Disc factor @10% Disc. c/f -65,000.00 1.00 -65,000.00 1 15,000.00 0.91 13,636.36 2 15,000.00 0.83 12,396.69 3 15,000.00 0.75 11,269.72 4 15,000.00 0.68 10,245.20 5 15,000.00 0.62 9,313.82 6 15,000.00 0.56 8,467.11 7 15,000.00 0.51 7,697.37 8 15,000.00 0.47 6,997.61 Cumm. Cash flows Investment to be covered -65,000.00 13,636.36 -51,363.64 26,033.06 -38,966.94 37,302.78 -27,697.22 47,547.98 -17,452.02 56,861.80 -8,138.20 65,328.91 328.91 73,026.28 8,026.28 80,023.89 15,023.89 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 5 Investment still to be covered in year 6 = $8,138.2 Discounted Payback = Year 6+ ($8,138.20/8,467)yr Discounted Payback = Year 6 +0.96yr So discounted payback = 6.96 years

Discounted payback = 6.96 years