An investment project has annual cash inflows of $3,900, $4,800, $6,000, and $5,200, for the next four years, respectively. The discount rate is 15 percent. a. What is the discounted payback period for these cash flows if the initial cost is $6,600

1.88 years

Explanation:

Payback period is the time in which a project returns back the initial investment.  Initial Investment is recovered within the first two annual Cash inflows.

Payback Period = 1+0.88 = 1.88 years

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The discounted payback period is 1.88 years

Explanation:

The discounted pay back period is the number of years it takes for the investment to break even by this it means how many years it takes discounted cash flows to pay the initial investment.

Initial Investment $6,600

W e then discount the cash inflows to find the time it takes to pay off initial investment

Year 1 = 3900/ (1.15) =$3,391.30

Remainder of initial investment = -6600+3391.30= -3,208.7

Year two = 4800/ 1.15^2 = $3,629.49

Remainder of initial investment = -3208.7-3629.49 = 420.79

This yield positive results therefore the discounted payback period is sometime between year 1 and year 2.

To get the exact period we take what reamined over what paid

3208.7/3629.49 = 0.88

So it 1 year + 0.88 =1.88  years

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