Discounted payback

Question

Project K costs $55,000, its expected cash inflows are $13,000 per year for 8 years, and its WACC is 7%. What is the project's discounted payback? Round your answer to two decimal places.

Answer 1

Hi C.C.

The quickest and easiest way to calculate the discounted payback period is to use a financial function calculator. First off, I'd disregard the 8 years because it's misleading and unnecessary for this particular methodology. Your entries would be: 55000=PV; 13000=PMT; 7=%; CPT N. Answer is 5.19 years.

Long hand would be as follows:

Year 1. 13000 x 0.9346 = 12150

Year 2. 13000 x 0.8734 = 11354

Year 3. 13000 x 0.8163 = 10612

Year 4. 13000 x 0.7629 = 9918

Year 5. 13000 x 0.7130 = 9269

Year 1-5 Total = 53303, which is 1697 shy of our original cost of 55000.

So ....

Year 6. 13000 x 0.6663 = 8662 .... 1697/8662 = 0.1959

Answer = 5 + 0.1959 = 5.1959 or 5.2 years (rounded to two places)

I hope this helps. Regards, GE