Question

Suppose a company has proposed a new 4-year project. The project has an initial outlay of $62,000 and has expected cash flows of $19,000 in year 1, $25,000 in year 2, $28,000 in year 3, and $34,000 in year 4. The required rate of return is 12% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

Answer 1

		Rate = R =	12.000000000%
Year	Cash flows	Discount factor = Df = 1/(1+R)^Year		Present value = Df x Cash flows		Cumulative discounted cash flow
0	-$62,000.00	1.00000		-$62,000.00		-$62,000.00
1	$19,000.00	0.89286		$16,964.29		-$45,035.71
2	$25,000.00	0.79719		$19,929.85		-$25,105.87
3	$28,000.00	0.71178		$19,929.85		-$5,176.02
4	$34,000.00	0.63552		$21,607.61		$16,431.59

Discounted Payback period = A + |B|/C

A = Last period with a negative discounted cumulative cash flow

|B| = Absolute value of discounted cumulative cash flow at end of period A

C = Discounted cash flow during the period after A

Discounted Payback period = 3 + |-5176.02|/21607.61

Discounted Payback period = 3 + 5176.02/21607.61

Discounted Payback period = 3.2