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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