Question

Estimated cash flows appear below for an investment project. The project is required rate of return (IRR) is 11.40%. What is the discounted payback period for the project in years

Answer 1

Answer: 3.83 years

Explanation:

The Discounted Payback period is used to determine how long it would take a project to payback the investment made in it given required return adjusted cashflows.

Year 1.

= 17,000 / ( 1 + 11.4%)

= $15,260

Year 2

= 20,000/ 1.114²

= $16,116

Year 3

= 27,000/1.114³

= $19,530

Year 4

= 30,000/1.114⁴

= $19,480

Investment Balance up to year 3

= -67,000 + 15,260 + 16,116 + 19,530

= -$16,904

The amount left is smaller than the discounted Cashflow for Year 4 so the Investment will be paid back in year 4.

= 16,904/19,480

= 0.83

0.83 of year 4 will be taken to pay off Investment.

In total;

= 3 complete years + 0.83 in 4th year

= 3.83 years.