Discounted Payback Sum

CFA Level I Corporate Finance
#1

Calculate the Discounted Pay Back Period and the required rate is 8%

Cash Flow

0 -50,000

1 15,000

2 15,000

3 20,000

4 10,000

5 5,000

Please help me with the formula

Thanks.

#2

Start by writing out the discounted cash flows by year.

I await your reply.

#3

How??

#4

Discount −50,000 for zero years at 8%.

Discount 15,000 for one year at 8%.

Discount 15,000 for two years at 8%.

And so on.

You do know how to discount cash flows, yes?

#5

yes

#6

So . . . ?

#7

r= 8% Cummulative No of years 0 -50,000 -50,000 -50,000 1 15,000 13,889 -36,111 2 15,000 12,860 -23,251 3 20,000 15,877 -7,374 4 10,000 7,350 -24 4.085540099 5 5,000 3,403 3,379 Sum of DCF 53,379 L= CFL

N=8%

K is no of the year L10/(1+N$7)K10

You need 4.08 years for project to repay investment

#8

Thanks, rafal.

Next time, please let yashraj do it. He’ll learn it a lot better if he does it than if you do. That was the point.

As long as you’ve jumped in here, please explain to yashraj the internal inconsistency of your discounted payback period calculation.

#9

Hi

I have presented a little inconsistency by not showing years in decimals. The recovery of the initial amount is after year 4 and 0.084 fraction of the year in terms of months. Skipping that discounted payback method yields 4.007 years or 4 years and 0.084 of last month

it should be = 24/3403= 4.007years

For the sake of clarity

  • This method fails to consider CFL beyond payback method
  • It’s a poor measure of profitability of the project