Discounting Cashflows: PayBack Period - Question3


Muh’d has a sum of $15000 to invest in a project that promises the following cash inflows
Year1-$4500, Year2-$4600, Year3-$6000, Year4-$2495, Year5-$4500 and Year6-$2000. If Muh’d has a rate of return of 15%, determine the payback period of the investment.
Solution
The discount factor for the respective years are calculated using the formula (1+r)-n
Thus, at 15% rate of return, we have the following discount factors for the respective years:
1           0.8696
2           0.7561
3           0.6575
4           0.5718
5           0.4972
6           0.4323
If we apply these discount factors calculated, we have what is represented in the table below.

The balance on invested sum if arrived at after deducting the present value each year. From the table above, it shows that the project will payback fully in five (5) years’ time.

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