Question

7. ACME Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC 11.00% Year 4 Cash flows -$1.125 $490 $520 $520 520

I have the answer but can you please explain how they got the amounts for Discounted CF and Cumulative Discounted CF? Thanks.

Answer 1

Ans Process for finding discounted rate is shown in column 3. Projected cash flow multiplied by discount rate gives discounted cash flow in column 5.

For Cumulative cash flows (in column 6), we just keep on adding cash flows in column 5 with sum of previous cash flows.

Year	Project Cash Flows (i)	DF@ 11% (ii)	DF@ 11% (ii)	PV of Project A ( (i) * (ii) )	Cumulative Cash Flow
0	-1125	1	1	(1,125.00)	(1,125.00)
1	490	1/(1 + 11%)^1	0.901	441.44	(683.56)
2	520	1/(1 + 11%)^2	0.812	422.04	(261.51)
3	520	1/(1 + 11%)^3	0.731	380.22	118.70
4	520	1/(1 + 11%)^4	0.659	342.54	461.24
		NPV		461.24
Discounted Payback Period =		2 years + 261.51/ 380.22
		2.69 years