Question

What is the discounted payback period for Model 334A?

Octavia Bakery is planning to purchase one of two ovens. The expected cash flows for each oven are shown below. MARR is 10%/ year. Model 127B Model 334A Initial Investment $48,000 $74,000 Estimated Life 10 5 End of Life Salvage $12,000 $0 Annual Income $19,100 $28,500 Annual Expense $9,600 $6,200

Answer 1

For finding a discounted payback period we need to find the present value of future revenue and then find Cumulative cash flow (CCF), we need to find the year in which CCF turns positive

We will use formula P = F/(1+i)^t to find the present value of future cash flows

Discounted payback period = Year bef CCF turns positive + (Absolute value of CCF bef it turns positive/Present value of cash flow in the year in which CCF turns positive)

using excel

Year	Investment	Annual revenue	Annual Cost	Salvage value	Net cash flow	Present value of Net Cash Flow	CCF
0	-74000				-74000	-74000.00	-74000
1		28500	-6200		22300	20272.73	-53727.27
2		28500	-6200		22300	18429.75	-35297.52
3		28500	-6200		22300	16754.32	-18543.20
4		28500	-6200		22300	15231.20	-3312.00
5		28500	-6200	0	22300	13846.55	10534.54

Discounted payback period = 4 + 3312 / 13846.55

= 4 + 0.24

= 4.24 yrs

Showing formula in excel

Year	Investment	Annual revenue	Annual Cost	Salvage value	Net cash flow	Present value of Net Cash Flow	CCF
0	-74000				=B153+C153+D153+E153	=F153/(1+0.1)^A153	=G153
1		28500	-6200		=B154+C154+D154+E154	=F154/(1+0.1)^A154	=H153+G154
2		28500	-6200		=B155+C155+D155+E155	=F155/(1+0.1)^A155	=H154+G155
3		28500	-6200		=B156+C156+D156+E156	=F156/(1+0.1)^A156	=H155+G156
4		28500	-6200		=B157+C157+D157+E157	=F157/(1+0.1)^A157	=H156+G157
5		28500	-6200	0	=B158+C158+D158+E158	=F158/(1+0.1)^A158	=H157+G158