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Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. The firm's cost of capital is 10 percent. What is the discounted payback period for this project

Respuesta :

Answer:

4.3 years

Explanation:

The computation of the discounted payback period is shown below:

Year  Cash flows Discount factor Present value Cumulative present value

0 -$1,250,000 1                     -$1,250,000  

1 $375,000 0.9090909090   $340,909.09 $340,909.0

2 $375,000 0.826446281       $309,917.36 $650826.45

3 $375,000 0.7513148009       $281,743.05 $932,569.50

4 $375,000 0.6830134554       $256,130.05 $1,188,699.54

5 $375,000 0.6209213231 $232,845.50   $1,421,545.04

Total                                                        $1,421,545.04

Now the discounted payback period is

= 4 years + ($1,250,000 - $1,188,699.54) ÷ $232,845.50

= 4.3 years

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