To calculate the discounted payback period, it is necessary to reduce the cash flow to the present value (year 0) by applying the given WACC (weighted average cost of capital). For year 1, we simply divide by 1.1. For year 2, we divide by 1.1², and so on.
Here is a tabulated version of the calculations. It is difficult to align the column heading, so they are given here:
1. Year
2. Cash Flow
3. Present value of Cash Flow, based on WACC of 10%
4. Cumulative present value of cash flow obtained by adding current year value to previous cumulative value.
0 -700.00 -700.00 -700.00
1 +525.00 +477.27 -222.73
2 +485.00 +400.83 +178.10
3 +445.00 +334.33 +512.43
4 +405.00 +276.62 +789.05
Note that the (+) signs have been added to align the columns properly, and have no other significance.
Conclusion, since the cumulative discounted cash flow goes from negative (-222.73) to positive (+178.10) during year 1, we conclude that the discounted payback is approximately 19 months.
Masulis Inc is considering a project that has the following cash flow and WACC Data .what is the project discounted payback
WACC 10%
years 0 1 2 3 4
CASH FLOW -700 525 485 445 405
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