Question

Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent.
Year
0 1 2 3 4 5
Glass Flows $51100 $13150 $16050 $23900 $12400 $3050
The discounted payback period is:________.
a. 0.39 year longer than the payback period.
b. 0.64 year longer than the payback period.
c. 0.76 years longer than the payback period.
d. 0.25 years longer than the payback period.

Answer 1

Answer:

c. 0.76 years longer than the payback period.

Explanation:

Payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows.

the amounted invested in the project = $-51100

In year 1, the amount recovered = $-51,100 + $13150 = $-37,950

In year 2, the amount recovered =  $-37,950 + $16050 = $-21,900

In year 3, the amount recovered =  $-21,900 + $23900 = $2000

the amount invested is recovered in 2 + 21,900 / 23900 = 2.92 years

Discounted payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows.

discounted cash flows

$13150 / 1.08 = $12,175.93

$16050 / 1.08^2 = $13,760.29

$23900 / 1.08^3 = $18972.59

$12400 / 1.08^4 = $9114.37

the amount is recovered in 3 + 6191.19 / 9114.37 = 3.68 years

the discounted payback is longer than the payback period by 3.68 years - 2.92 years = 0.76 years