Consider the following two mutually exclusive projects: |
Year | Cash Flow (A) | Cash Flow (B) |
0 | –$313,058 | –$15,540 |
1 | 29,800 | 5,197 |
2 | 59,000 | 8,698 |
3 | 58,000 | 13,394 |
4 | 425,000 | 8,632 |
Whichever project you choose, if any, you require a 6 percent return on your investment. |
a. What is the payback period for Project A? |
b. What is the payback period for Project B? c. What is the discounted payback period for Project A? |
a. Payback Period Project A= ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
= 3 + (166,258/ 425,000)
= 3.39 Years
Hence the correct answer is 3.39 Years
Note:
Year | Investment | Cash Inflow | Net Cash Flow | |
0 | -3,13,058 | - | -3,13,058 | (Investment + Cash Inflow) |
1 | - | 29,800 | -2,83,258 | (Net Cash Flow + Cash Inflow) |
2 | - | 59,000 | -2,24,258 | (Net Cash Flow + Cash Inflow) |
3 | - | 58,000 | -1,66,258 | (Net Cash Flow + Cash Inflow) |
4 | - | 4,25,000 | 2,58,742 | (Net Cash Flow + Cash Inflow) |
b. Payback Period Project B= ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
= 2 + ( 1645 / 13394)
= 2.12 Years
Hence the correct answer is 2.12 Years
Note:
Year | Investment | Cash Inflow | Net Cash Flow | |
0 | -15,540 | - | -15,540 | (Investment + Cash Inflow) |
1 | - | 5,197 | -10,343 | (Net Cash Flow + Cash Inflow) |
2 | - | 8,698 | -1,645 | (Net Cash Flow + Cash Inflow) |
3 | - | 13,394 | 11,749 | (Net Cash Flow + Cash Inflow) |
4 | - | 8,632 | 20,381 | (Net Cash Flow + Cash Inflow) |
c. Discounted Payback Period = ( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]
= 3 + ( 183737.084076117 / 336639.806876159)
= 3.55 Years
Hence the correct answer is 3.55 Years
Note:
Cash Flow | Discounting Factor ( 6%) | Present Value (Cash Flow * Discounting Factor) | Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year) | |
0 | -3,13,058 | 1 | -3,13,058.00 | -3,13,058.00 |
1 | 29,800 | 0.943396226415 | 28,113.207547170 | -2,84,944.792453 |
2 | 59,000 | 0.889996440014 | 52,509.789960840 | -2,32,435.002492 |
3 | 58,000 | 0.839619283032 | 48,697.918415874 | -1,83,737.084076 |
4 | 4,25,000 | 0.792093663238 | 3,36,639.806876159 | 1,52,902.722800 |
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