Question

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%. What is the project's discounted payback period? Round your answer to two decimal places.

Answer 1

Answer:

It will take 7 years and 156 days to pay back.

Explanation:

Giving the following information:

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%.

To calculate the discounted payback period, we need to discount each cash flow until the initial investment is cover.

PV= Cf/ (1+i)^n

Discounted cash flow     Pay back

Year 1= 9,000/(1.11)= 8,108.11                        31,819.89

Year 2= 9,000/(1.11^2)= 7,304.60                  24,515.29

Year 3= 9,000/(1.11^3)= 6,580.72                  17,934.57

Year 4= 9,000/(1.11^4)= 5,928.58                  12,005.99

Year 5= 9,000/(1.11^5)= 5,341.06                  6,664.93

Year 6= 9,000/(1.11^6)= 4,811.77                   1,853.16

Year 7= 9,000/(1.11^7)= 4,334.93                  0

To be more accurate:

(1,853.16/4334.93)*365= 156 days

It will take 7 years and 156 days to pay back.