Question

A project has an initial cost of $44,000. Expected cash flows as a result of this project are projected as indicated below. Calculate the payback period for this project. Assume a discount rate of 9%.
Project X t Cash Flows
0 -44,000
1 10,000
2 10,000
3 15,000
4 18,000
5 15,000
Rate %: 9

Answer 1

Answer:

It will take 5 years and 99 days to recover for the initial investment at a discount rate of 9%.

Explanation:

Giving the following information:

Project X t Cash Flows

0 -44,000

1 10,000

2 10,000

3 15,000

4 18,000

5 15,000

The payback period is the time required to cover for the initial investment. We need to discount each cash flow using the following formula:

PV= Cf/(1+i)^n

Year 1= 10,000/1.09= 9,174.31 - 44,000= -34,825.69

Year 2= 10,000/1.09^2= 8,416.80 - 34,825.69= -26,408.89

Year 3= 15,000/1.09^3= 11,582.75 - 26,408.89= 14,826.14

Year 4= 18,000/1.09^4= 12,751.65 - 14,826.14= - 2,074.49

Year 5= 15,000/1.09^5= 9,748.97 - 2,074.49= 7,674.48

To be more accurate:

(2,074.49/7,674.48)*365= 99

It will take 5 years and 99 days to recover for the initial investment at a discount rate of 9%.