Answer:
1. Assuming a 0% discount rate, the cashflows will not be discounted.
Discounted Payback period will therefore be;
= 10,000/2,880
= 3.47 years
2. Assuming the discount rate was 5%, the discounted payback period is;
Trial and error;
= 2,880/1.05 + 2,880/1.05² + 2,880/1.05³
= $7,842.95
Payback will be in 4th year;
Amount left to be paid = 10,000 - 7,842.95 = $2,157.05
Cash inflow in 4th year = 2,880/1.05⁴ = $2,369.38
Discounted payback period = Year before payback + Amount left/ Amount in year of payback
= 3 + 2,157.05/2,369.38
= 3.91 years
3. Assuming 19%:
= 2,880/1.19 + 2,880/1.19² + 2,880/1.19³ + 2,880/1.19⁴ + 2,880/1.19⁵ + 2,880/1.19⁶
= $9,820.16
Project will give cash inflows for 6 years. At 6 years the investment would not have been paid off so the project will never be paid off.
