Question

A engineering firm plans to buy new software to improve efficiency. The software has an initial cost of $18,000, and is expected to increase profit by $2,000 per year. Determine the payback period for the software including the effect of interest using an MARR of 4%. Express your answer in years to the nearest whole year.

Answer 1

Year	Cash Flow	Net Cash Flow	Discounted Cash Flow	Net Discounted Cash Flow
Year 0	$-18,000.00	$-18,000.00	$-18,000.00	$-18,000.00
Year 1	$2,000.00	$-16,000.00	$1,923.08	$-16,076.92
Year 2	$2,000.00	$-14,000.00	$1,849.11	$-14,227.81
Year 3	$2,000.00	$-12,000.00	$1,777.99	$-12,449.82
Year 4	$2,000.00	$-10,000.00	$1,709.61	$-10,740.21
Year 5	$2,000.00	$-8,000.00	$1,643.85	$-9,096.36
Year 6	$2,000.00	$-6,000.00	$1,580.63	$-7,515.73
Year 7	$2,000.00	$-4,000.00	$1,519.84	$-5,995.89
Year 8	$2,000.00	$-2,000.00	$1,461.38	$-4,534.51
Year 9	$2,000.00	$0.00	$1,405.17	$-3,129.34
Year 10	$2,000.00	$2,000.00	$1,351.13	$-1,778.21
Year 11	$2,000.00	$4,000.00	$1,299.16	$-479.05
Year 12	$2,000.00	$6,000.00	$1,249.19	$770.15

Using Interpolation

Discounted Payback period = 11 + [- 479.05 – 0 / (-479.05 – (770.150]* 1 = 11.38 years