To find the discounted payback period, we need to calculate the present value of the cash flows and determine the point at which the cumulative present value equals or exceeds the initial investment.
The present value of the cash flows can be calculated using the formula:
PV = CF / (1 + r)^n
Where PV is the present value, CF is the cash flow, r is the discount rate (WACC), and n is the year.
Using the WACC of 9%, the present value of the cash flows in each year is as follows:
Year 0: PV = -$1,100 / (1 + 0.09)^0 = -$1,100
Year 1: PV = $550 / (1 + 0.09)^1 = $550 / 1.09 = $504.59
Year 2: PV = $550 / (1 + 0.09)^2 = $550 / 1.1881 = $462.41
Year 3: PV = $550 / (1 + 0.09)^3 = $550 / 1.2950 = $424.47
Now, we can calculate the cumulative present value:
Cumulative present value year 0: -$1,100
Cumulative present value year 1: -$1,100 + $504.59 = -$595.41
Cumulative present value year 2: -$595.41 + $462.41 = -$133.00
Cumulative present value year 3: -$133.00 + $424.47 = $291.47
The discounted payback period is the year at which the cumulative present value becomes positive. In this case, the cumulative present value becomes positive in year 3. Therefore, the discounted payback is 3 years.
Answer: 3.00
Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.
WACC:
9%
Year:
0
1
2
3
Cash flows:
-$1,100
$550
$550
$550
1 answer
1 answer