Question

1. Consider the investment project in the table below with four-year investment life

2. n	Project Cash Flow ($)
   0	-$ 3,500
   1	$ 1,600
   2	$ 2,800
   3	$ 3,500
   4	$ 2,200

3. What is the payback period? (5 points) (show all your work).
4. What is the discounted payback period if the firm’s interest rate is 15% after taxes? (9 points) (show all your work).

Answer 1

Year	Cash flows	Cumulative Cash flows
0	(3500)	(3500)
1	1600	(1900)
2	2800	900
3	3500	4400
4	2200	6600

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=1+(1900/2800)

=1.68 years(Approx).

Year	Cash flows	Present value@15%	Cumulative Cash flows
0	(3500)	(3500)	(3500)
1	1600	1391.30	(2108.7)
2	2800	2117.20	8.5
3	3500	2301.31	2309.81
4	2200	1257.86	3567.67(Approx).

Hence discounted payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=1+(2108.7/2117.20)

=2 years(Approx).