Question

Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.)

Answer 1

Answer:

Simple Payback period is 2.52 years.

Discounted Payback period is 2.97 years

Explanation:

Payback period is the number of years that a project takes to recover the project's initial investment.

Simple Payback

Project A                                                                                          

Time:                0            1            2            3             4              5

Cash flow    –$1,500   $550    $630     $620       $400       $200

Payback period = 550/550 + 630/630 + (1500-550-630)/620 = 2.52 years

Payback period = Approximately 2.52 years

In simple term it will take 2.52 years to recover the initial investment.

Discounted payback

Project A                                                                                          

Time:                0            1            2            3             4              5

Cash flow    –$1,500   $550    $630     $620       $400       $200

PV @ 9%      –$1,500   $505    $530     $479       $283        $130

Payback period = 505/505 + 530/530 + (1500-505-530)/479 = 2.97 years

Payback period = Approximately 2.97 years

It will take about 2.97 years to recover the initial investment of $1,500 using discount rate of 9%