Compute the payback statistic for Project A if the appropriate cost of capital is 7 percent...

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Compute the payback statistic for Project A if the appropriate cost of capital is 7 percent and the maximum allowable payback period is four years.

Time:	0	1	2	3	4	5
Cash flow:	–$1,700	$630	$690	$660	$440	$240

compute payback in years

business finance

Answer 1

Answer #1

Payback Period is the time in which initial investment comes back as inward cash flow.

Payback Period = 1(630) + 1(690) + 0.57(380/660)

Payback Period = 2.57 years

Discounted Payback Period,

Year 1, 630/1.07 = $588.78

Year 2, 690/(1.07)² = $602.67

Year 3, 660/(1.07)³ = $538.75

Year 4, 440/(1.07)⁴ = $335.67

Discounted Payback Period = 1(588.78) + 1(602.67) + 0.944(508.55/538.75)

Discounted Payback Period = 2.944 years

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Answer 2

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