Question

Project L costs $55,000, its expected cash inflows are $10,000 per year for 12 years, and its WACC is 11%. What is the project's payback? Round your answer to two decimal places. ____years

Answer 1

Answer:

Normal Payback period:

Given

Initial cost P=$55000

Annual Cash flow A=$10000

So since in 5 years we can recover $50000(5*10000=50000) so

pay back period = 5+(55000-50000)/1000-=5.5 years

Discounted payback period

Discounted cash flow = CF/(1+WACC)^t

CF= cash flow

WACC=11%

t=year in which cash flow occur

Year	cash flow	discounted cash flow	Cumulative discounted cash flow
1	10000	9009.01	9009.01
2	10000	8116.22	17125.23
3	10000	7311.91	24437.15
4	10000	6587.31	31024.46
5	10000	5934.51	36958.97
6	10000	5346.41	42305.38
7	10000	4816.58	47121.96
8	10000	4339.26	51461.23
9	10000	3909.25	55370.48
10	10000	3521.84	58892.32
11	10000	3172.83	62065.15
12	10000	2858.41	64923.56

From above table we find that payback period will be between 8 and 9 so
Discounted pay back period = 8+(55000-51461.23)/3909.25=8.91 years