An investment project costs $10,000 and has annual cash flows of $2,840 for six years. 1. What is...

Question:

An investment project costs $10,000 and has annual cash flows of $2,840 for six years.

1. What is the discounted payback period, if the discount rate is zero percent?

2. What is the discounted payback period, if the discount rate is 5 percent?

3. What is the discounted payback period, if the discount rate is 20 percent?

Payback period:

Payback period is one of the methodologies used to evaluate a project under capital budgeting. This methodology calculates the amount of time that we will be able to recover our investments. In other words, this answers the question " How many years will take before we recover our initial cost?". The traditional payback period does not use the concept of time value of money. However, there are variations of this that uses the time value of money called the discounted payback period.

Answer and Explanation:

a) Assuming a zero percent discount rate, the discounted payback period can simply be computed as:

=$10,000 / $2,840

=3.52 Years

b) Assuming a 5%...

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Payback Analysis: Formula & Example

from Introduction to Management: Help and Review

Chapter 16 / Lesson 12
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