CH. 9, #2 An investment project costs $10,000 and has annual cash flows of $2,88
ID: 2729158 • Letter: C
Question
CH. 9, #2
An investment project costs $10,000 and has annual cash flows of $2,880 for six years.
What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
What is the discounted payback period if the discount rate is 5 percent? (Enter 0 if the project never pays back. Round youranswer to 2 decimal places, e.g., 32.16.)
What is the discounted payback period if the discount rate is 19 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
project costs =$10,000
annual cash flows = $2,880
years= 6
discount rate = 0%
Cashflow for year 3= (2880*3)= 8640
Therefore,
PAyback period= 3+ [(10000-8640)] /2880= 3.472 years or 3.5 years
If, Discounted rate= 5%
Discounted CF for 3 years= 2742.857+2612.245+2487.852= 7842.954
Payback period= 3+[ (10000-7842.954)/2369.383 ] = 3.91 years
If, Discounted rate= 19%
Total Discounted cash flow for 6 years= 2420.168+2033.755+1709.375+1436.166+1206.862+1014.17= $ 9820.158
Since the total investment (10000) is more than the discounted cashflow(9820.158) , the project never pay backs.
Therefore, Payback period= 0
year CF Discounted CF= 2880/(1.05)^n 1 2880 2742.857 2 2880 2612.245 3 2880 2487.852 4 2880 2369.383 5 2880 2256.555