Question

A power plant is being considered in the dead sea location. For an initial investment

of $100 million, annual net revenues are estimated to be $15 million in years 1–5 and $20 million

in years 6–20. Assume no residual market value for the plant.

a. What is the simple payback period for the plant?

b. What is the discounted payback period when the MARR is 6% per year?

c. Using an equivalency technique (FW, PW, or AW), MARR is 6% per year, would you

recommend investing in this project?

draw the cash flow diagram if applicable.

Answer 1

Solution:-

To Calculate Payback Period-

Payback Period
Year	Cash Flow	Cummulative Cash Flow
0	-100
1	15	15
2	15	30
3	15	45
4	15	60
5	15	75
6	20	95
7	20	115
8	20	135
9	20	155
10	20	175
11	20	195
12	20	215
13	20	235
14	20	255
15	20	275
16	20	295
17	20	315
18	20	335
19	20	355
20	20	375

Payback Period = $Payback Period in Previous year + \frac{Amount to be recoeverd}{Next year cash flow}$

Payback Period = $6 + \frac{100-95}{20}$

Payback Period = 6.25 years

To Calculate Discounted Payback Period-

Discounted Payback Period of Project
Year	Cash flow	Discounting Factor @6%	Discounted Cash flows	Cummulative Discounted Cash flows
0	-100	1.00	-100
1	15	0.943	14.15	14.15
2	15	0.890	13.35	27.50
3	15	0.840	12.59	40.10
4	15	0.792	11.88	51.98
5	15	0.747	11.21	63.19
6	20	0.705	14.10	77.28
7	20	0.665	13.30	90.59
8	20	0.627	12.55	103.13
9	20	0.592	11.84	114.97
10	20	0.558	11.17	126.14
11	20	0.527	10.54	136.68
12	20	0.497	9.94	146.62
13	20	0.469	9.38	155.99
14	20	0.442	8.85	164.84
15	20	0.417	8.35	173.18
16	20	0.394	7.87	181.06
17	20	0.371	7.43	188.48
18	20	0.350	7.01	195.49
19	20	0.331	6.61	202.10
20	20	0.312	6.24	208.34

Discounted Payback Period = $Discounted Payback Period in Previous year + \frac{Amount to be recoeverd}{Next year discounted cash flow}$

Discounted Payback Period = $7 + \frac{100 - 90.59}{12.55}$

Discounted Payback Period = 7.75 years

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