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# Payback and Discount payback

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Payback and Discounted Payback

A. A company is determining whether or not to invest in a project of limited duration. The cash flows that correspond to the project are as follows:

Annual Cash Flows
Year 1 \$400,000
Year 2 \$400,000
Year 3 \$400,000
Year 4 \$400,000
Year 5 \$400,000

The payback period has been determined to be three and one-half years. What is the amount of the initial investment?

B. A company is determining whether or not to invest in a project of limited duration. The cash flows that correspond to the project are as follows:

Annual Cash Flows
Year 1 \$300,000
Year 2 \$250,000
Year 3 \$100,000 (Total cumulative amount = \$650,000)
Year 4 \$200,000
Year 5 \$250,000

The initial investment required to start this project is \$700,000.

1) What is the payback period?

2) What is the discounted payback period, assuming that the required cost of capital is 10 percent? (Round your cumulative cash flows to the nearest whole number. Round your final answer to two decimal points.)

#### Solution Preview

Payback and Discounted Payback

A. A company is determining whether or not to invest in a project of limited duration. The cash flows that correspond to the project are as follows:

Annual Cash Flows
Year 1 \$400,000
Year 2 \$400,000
Year 3 \$400,000
Year 4 \$400,000
Year 5 \$400,000

The payback period has been determined to be three and one-half years. What is the amount of the initial investment?

Payback period = Initial ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what is the amount of the initial investment.

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## Payback/discounted payback period

The shop foreman at Santa Barbara Rig Service proposed a portable service unit requiring an initial outlay of \$100,000 and providing the following year-end cash flows:

Year 1 2 3 4 5
Cash flow 30000 -50000 70000 60000 50000

At a 10% required return, find the payback period and present value payback period (discounted payback period) for the investment. Interpret these measures for a manager who is not trained in finance.

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