To calculate the payback period, we need to calculate the
cumulative cash flows
Payback period is the period when the cumulative cash flow
becomes positive
|
Time |
Cash Flow |
Cumulative Cash Flow |
|
0 |
-5000 |
-5000 |
|
1 |
1200 |
-3800 |
|
2 |
2400 |
-1400 |
|
3 |
1600 |
200 |
|
4 |
1600 |
1800 |
|
5 |
1400 |
3200 |
|
6 |
1200 |
4400 |
Hence, Payback period = 2 + 1400/1600 = 2.875 years
To calculate the discounted payback period, we need to find the
discounted cumulative cash flow
Discounted cash flow = Cash Flow / (1 + discount
Rate)year
|
Time |
Cash Flow |
Discounted Cash Flow |
Cumulative Cash Flow |
|
0 |
-5000 |
-5000 |
-5000 |
|
1 |
1200 |
1111.111111 |
-3888.8889 |
|
2 |
2400 |
2057.613169 |
-1831.2757 |
|
3 |
1600 |
1270.131586 |
-561.14413 |
|
4 |
1600 |
1176.047764 |
614.90363 |
|
5 |
1400 |
952.8164758 |
1567.72011 |
|
6 |
1200 |
756.2035523 |
2323.92366 |
Discounted Payback period = 3 + 561.14/1176.05 = 3.477 years
Since, both the payback period and discounted payback period is
within the maximum allowable threshold, the project should be
accepted
