Question

masulis inc. is considering a project that has the following cash flow and wacc data. what is the project's discounted payback? wacc: 10.00% year 0 1 2 3 4 cash flows -$825 $525 $485 $445 $405

Answer 1

Discover the PV of each year's cashflow to determine the deferred payback period;

Year           PV of CF                  Net CF

0                 -950                           -950

1              525/1.1 = 477.2727         -472.7273

2           485/1.1² = 400.8264         -71.9009

3            445/ 1.1³ = 334.3351          262.4342

Discounted payback = last year with negative Net CF + (Absolute net CF that year/ PV of CF the following year)

= 2 +(71.9009/334.3351  )

= 2 + 0.215

= 2.22 years

What impact does discounting anticipated cash flows have on the payback duration of a project?

Based on calculating the present value of the project's anticipated cash flows, the discounted payback time calculation indicates how long it will take to recover an investment. A project or investment will generate cash flows to cover the initial cost sooner if the discounted payback period is shorter.

What should be made of a profitability index of 0?

After the initial cash flow, the project's cash flows have a present value of zero. The profitability index and Net Present Value are strongly related.

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